Japan's government has managed to meet caps on spending and new bond issuance in compiling a budget for the year from next April, the finance minister said on Friday, as the government struggles to mend tattered public finances.

With new debt issuance seen topping tax revenues for the second straight year in the initial budget, Economics Minister Banri Kaieda stressed the need to rectify the severe fiscal situation as soon as possible, calling it abnormal.

The fact that new bond issuance exceeds tax revenues is not at all normal. We need to rectify this as soon as possible, Kaieda told reporters after a cabinet meeting.

Finance Minister Yoshihiko Noda said he hoped the 2011/12 budget, set to be approved by the cabinet later on Friday, will help to boost the flagging economy and job market.

But a divided parliament clouds the outlook for its implementation, creating an additional headache for Prime Minister Naoto Kan as he confronts low voter support and a bitter feud inside his ruling party over scandal-plagued powerbroker Ichiro Ozawa.

The budget, the first that the Democratic Party-led government has compiled from scratch, keeps new borrowing at about 44.3 trillion yen ($534 billion), in line with its promise to hold fresh debt issuance to this year's level.

Noda also said the government had adhered to a self-imposed cap on spending, excluding debt servicing, at this year's level around 71 trillion yen, aiming to rein in a public debt that is about the twice the size of Japan's $5 trillion economy.

The budget is almost certain to be enacted, since the ruling Democratic Party of Japan (DPJ) controls parliament's powerful lower house and the budget would take effect even if rejected by the opposition-controlled upper chamber.

But passage of bills needed to implement and fund the spending, such as one on issuing deficit-financing bonds, is far from certain as they need approval by both houses of parliament.

Market players are well aware of risks such as a delay in parliamentary deliberations on the budget, said Takahide Kiuchi, chief economist at Nomura Securities.

Although opposition parties are unlikely to take the budget hostage for fear of public criticism, they could win concessions such as resignation of the entire cabinet in return for passage of budget bills.

The main opposition party Liberal Democratic Party wants the government to drop some of its key campaign pledges including payments to families with children, while the government has scaled back such spending plans due to lack of revenue.

Tax revenues are seen rising to about 41 trillion yen, falling short of new debt issuance despite an increase of about 4 trillion yen compared with this year's initial budget figure as the economy recovered from a deep recession.

To balance the 2011/12 budget, the cash-strapped government is expected to scrape together about 7 trillion yen of non-tax revenues, the bulk of it by raiding cash reserves from special accounts and administrative agencies.

Government officials say non-tax revenues are only a near-term solution and it will be even harder to compile budgets from next year onwards without raising the sales tax or making deep spending cuts to tackle rising welfare costs due to fast-aging society.

The government says it will seek to implement comprehensive tax reform -- coded wording for a sales tax hike -- in fiscal 2012/13, but it could face stiff resistance from ruling party lawmakers wary of alienating voters.

(Additional reporting by Linda Sieg; Editing by Michael Watson)

Japan