Japan's government needs to be careful about taking on new debt to fund relief and reconstruction after this month's deadly earthquake and tsunami and may review its plan to cut the corporate tax rate, top economic officials said on Friday.

Finance Minister Yoshihiko Noda said the government would aim to have the first emergency budget ready by the end of April and suggested it would not rely heavily on extra borrowing to fund it, reflecting worries over Japan's massive public debt.

The material damage from the magnitude 9.0 earthquake and tsunami that struck Japan's northeast on March 11 could exceed $300 billion, the government estimated this week, making it the world's costliest natural disaster.

We cannot easily increase government bond issuance, Noda told reporters, adding that the emergency budget would be compiled in cooperation with the opposition, whose help is needed to pass enabling bills in a divided parliament.

Even if we craft the extra budget, it would not mean a thing if it fails to pass the parliament, he said.

Speaking separately, Economics Minister Kaoru Yosano said that the government might need to reconsider its plan to cut the corporate tax rate by 5 percentage points from the fiscal year starting in April, given the reconstruction needs.

The effective tax rate for Japanese companies is higher than in most major economies at around 40 percent.

If the corporate tax cut serves to encourage employment, investment, research and development, that would be a step in the right direction and needed for the sake of the society and economy, Yosano said. But given the current situation, we need to rethink whether the corporate tax (cut) based on such thinking is something the whole society demands.


Economists polled by Reuters this week forecast quake-related government spending may add up to as much as almost $250 billion, with the first emergency budget expected to come in at around $62 billion.

Ruling party officials say two or more extra budgets will be needed to finance Japan's biggest rebuilding effort since the post-World War Two reconstruction.

The government has yet to decide how it will finance those budgets, which most certainly will require new borrowing.

Yet with public debt already twice the size of its $5 trillion economy -- the highest among industrialized nations -- Tokyo is wary of adding another big chunk to that debt pile.

Government sources told Reuters this week that cuts to some spending plans and shifts within the regular budget could go a long way to covering the first emergency budget if it was limited in scope and focused on the most urgent needs.

Cutting the corporate tax, however, was seen as an important pro-business gesture by the Democratic Party, which in 2009 swept to power promising to ramp up support for families.

Now, the Liberal Democratic Party, which ruled Japan almost without interruption for half a century, and other opposition parties want the government to ditch some key spending pledges to free up funds for reconstruction.

The Democrats, who need opposition votes in the upper house to pass a bill allowing it to sell more bonds, have signaled they would be ready to cut some pledges, including extra funds earmarked for child support and a scrapping of highway tolls.

But government officials say it will be difficult to roll-back all of the pledges worth around 3.6 trillion yen, given concerns among ruling party lawmakers that this could alienate voters ahead of local elections due next month.

Before the earthquake the opposition had been blocking the passage of budget-related bills to force the deeply unpopular Prime Minister Naoto Kan either to resign or to call an early election.

Since then, opposition parties have said they would support the government's relief and reconstruction efforts, but demands for spending cutbacks suggest they will seek concessions from the government in return for their backing of emergency bills.

The Finance Ministry has estimated the planned corporate tax cut, if implemented in the next fiscal year, would reduce tax revenue by 430 billion yen. ($1 = 80.985 Japanese Yen)

(Additional reporting by Leika Kihara; Writing by Tomasz Janowski; Editing by Nathan Layne)