Japan will not issue new debt to fund an initial extra budget of more than $35 billion for disaster relief, the Asahi newspaper said, in a sign the government is wary of alarming bond investors by adding too much to Japan's already huge debt pile.

But after the first extra budget, which will focus on funding immediate cleanup and repair work from last month's devastating earthquake and tsunami, the government will likely spend far more in subsequent emergency budgets and may need to issue new bonds to cover the costs, analysts say.

The more than 3 trillion yen ($35 billion) in the supplemental budget will pay for repairing roads, ports and schools, as well as helping those in quake-hit regions in Japan's northeast find new jobs, the Asahi reported on Wednesday.

To maintain (market) trust, the government will not use bonds as a source of revenue and therefore will not issue additional bonds, the draft of the extra budget said, according to the paper.

The government will instead cover the costs by reviewing some of the spending pledges by the ruling Democratic Party, such as payouts to households with children, and tapping about 2.5 trillion yen from reserves in special accounts, it said.

Japan is facing its worst crisis since World War Two after a 9.0 magnitude earthquake and a tsunami towering more than 10 meters battered its northeast coast, leaving nearly 28,000 dead or missing and rocking the world's third-largest economy.

COSTLIEST DISASTER

The government estimates the material damage alone could top $300 billion, making it by far the world's costliest natural disaster.

But the cost will be much higher as power supply shortages, triggered by a nuclear plant crisis, and supply chain disruptions hit factory output and business sentiment.

The Bank of Japan will likely stand pat on monetary policy at a meeting on Thursday but will revise down its economic assessment and signal its readiness to ease further when necessary to support the economy.

Prime Minister Naoto Kan has said he hoped to submit the first extra budget to parliament for debate by the end of this month, and has not ruled out tax hikes to pay the costs.

Japan does not face a Greek-style debt crisis because its public debt is held almost entirely by domestic investors.

But markets are keeping a close eye on whether disaster relief costs will force the government to issue new bonds. That would add to Japan's huge public debt which, at twice the size of its $5 trillion economy, is the worst among major industrialized nations.

Analysts say the government will probably need two more extra budgets, with total spending on supplemental budgets likely to reach a combined 10 trillion yen or more.

Deputy Finance Minister Mitsuru Sakurai also last week signaled that Japan may eventually need to spend more than 10 trillion yen on emergency budgets, with a portion possibly covered by new taxes.

Some analysts believe the total bill could escalate to 20 trillion yen, however, given the extent of the disaster, with accurate estimates hard to come by as Japan is still struggling with the nuclear safety crisis and a potential power supply crunch while about 160,000 people remain homeless.

Bond strategists said they were closely watching the debate about the size and financing of extra budgets, but so far the figures suggested by officials and floated in the media were broadly in line with market expectations and did not warrant any sharp reaction.

(Additional reporting by Tetsushi Kajimoto; Editing by Yoko Nishikawa, Edmund Klamann)

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