Japan 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, top economic officials said on Friday.

Finance Minister Yoshihiko Noda said the government aimed to get its 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 that unleashed a deadly tsunami on Japan's northeast on March 11 could exceed $300 billion, the government estimated this week.

That makes it the world's costliest disaster even without the further impact of power cuts and a drawn out struggle to contain the damage at a stricken nuclear plant 240 km (150 miles) north of Tokyo. More than 27,000 people are dead or missing.

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. The Finance Ministry has estimated the cut would reduce tax revenue by some 430 billion yen ($5.3 billion).

If the corporate tax cut serves to encourage employment, investment, research and development, that would be a step in the right direction, 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.

REBUILDING EFFORT

Economists polled by Reuters this week forecast Japan's biggest rebuilding effort since the post-World War Two period could cost the government as much as $250 billion, with the first emergency budget seen at around $62 billion.

Noda, who earlier rejected calls for a special relief tax, on Friday dismissed suggestions that Japan could use some of its $1 trillion in foreign reserves for funding, underscoring that fiscal savings and borrowing would have to do the job.

The foreign exchange account is to be used for currency intervention aimed at stabilizing the foreign exchange markets and for management of foreign currencies for this purpose, he told parliament.

I know the quake reconstruction will require a lot of money but we basically cannot pay for it through the foreign exchange account.

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.

Bank of Japan Governor Masaaki Shirakawa said the central bank would do its part to help the government, continuing to pump trillions of yen into the banking system and buying government bonds in the market.

It is important to create an environment where government bonds are absorbed smoothly by the markets, Shirakawa told a parliamentary committee. To this end, we have supplied ample funds to markets, including massive government bond purchases, and have eased policy.

Our stance of supplying ample money to markets will remain unchanged in the future.

In a sign that financial markets were recovering from the initial shock of the disaster, Tokyo stocks <.N225> rose on Friday, largely driven by foreign buying <.T>, while the yen held near 81 to the dollar, well below last week's all-time peak of 76.25 that prompted a rare joint Group of Seven intervention.

Noda, keen to prevent a surging yen from hobbling the post-disaster recovery, said Tokyo would keep cooperating with G7 on currencies -- a hint that more coordinated action was possible.

Government sources told Reuters this week that spending cuts could cover much of the first emergency budget.

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 to pass a bill allowing it to sell more bonds, have signaled readiness to drop some pledges, including extra funds for child support.

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

($1 = 80.985 Japanese Yen)

(Additional reporting by Leika Kihara and Rie Ishiguro; Writing by Tomasz Janowski; Editing by Nathan Layne & Kim Coghill)

Japan Review