By Tetsushi Kajimoto
TOKYO (Reuters) - Japan's government approved a $25 billion extra budget on Tuesday for disaster relief after the March 11 earthquake that will not require new bond issuance, though bigger spending later this year is likely to strain stretched public finances.
The extra budget follows a 4 trillion yen ($50 billion) emergency budget passed by parliament in May to cope with the world's costliest natural disaster, caused by the magnitude 9.0 earthquake and tsunami, and the subsequent nuclear crisis. The supplementary budget will be sent to parliament in mid-July.
Investors count on reconstruction spending to help the world's third-largest economy pull out from a post-disaster slump and resume moderate growth.
But with the first two packages limited in size and scope, markets pin their hopes on a third batch expected later this year that is seen topping 10 trillion yen and involving reconstruction bond issuance and tax hikes to repay it.
Prime Minister Naoto Kan, under fire for his response to the radiation crisis at the Fukushima nuclear plant, cited the passage of the second extra budget as one of the conditions for keeping his promise to resign. Kan said last month he would step down once certain progress was achieved in containing the crisis but kept the timing vague frustrating his critics in the opposition and his own party.
"With this budget we aim to ensure steps toward restoration and pave the way for reconstruction," Finance Minister Yoshihiko Noda told reporters after a cabinet meeting.
The budget bill will require backing from the opposition which controls the parliament's upper house. Opposition parties have signaled they would support the emergency spending, but showed no appetite for a compromise on another bill authorizing the government to finance the deficit in the regular 2011/2012 budget by issuing new bonds.
Noda warned that come September the government will struggle to stick to its spending plans if the deficit-financing bill is not passed in the current parliament session that runs until the end of August.
The supplementary budget features compensation to those affected by the nuclear meltdown in Fukushima and measures to help the indebted individuals and businesses in the quake-hit areas secure new loans.
The extra budget will be funded entirely with leftover funds from last fiscal year's budget, with 545.5 billion yen set aside for local governments in the disaster-hit areas.
The government is keen to fund as much of emergency spending as possible without new borrowing as it is saddled with a public debt that is already twice the size of the $5 trillion economy.
It used fiscal reserves to finance the first emergency budget while higher-than-planned tax revenues in the 2010/2011 fiscal year allowed it to finance the 2 trillion yen installment without issuing more bonds.
In order to use the leftover funds, the government must pass a special bill in parliament, where the opposition controls the upper house and has been piling pressure on Kan to quit by blocking bills including one enabling deficit-bond issuance.
The government will allocate 77.4 billion yen in the extra budget to support loans to borrowers from the affected areas and 300 billion yen for families whose homes were destroyed by the disaster.
The budget also includes 275.4 billion yen related to compensation to those affected by the nuclear meltdown at the Fukushima Daiichi plant, operated by Tokyo Electric Power Co.
This includes 7 billion yen set aside for a planned organization to handle compensation to victims once a relevant bill is passed by parliament.
The government set up a framework in the extra budget to issue 2 trillion yen in special-purpose bonds to help finance the planned organization, and it earmarked 20 billion yen in the extra budget for interest payments. It also created government guarantees worth 2 trillion yen for the new organization.
The second extra budget also includes 800 billion yen for contingency funds related to reconstruction.
($1 = 80.770 Japanese Yen)
(Editing by Tomasz Janowski)