Japan PM's coalition trims draft budget despite spending pressure

By Makiko Yamazaki

TOKYO (Reuters) -Japanese Prime Minister Shigeru Ishiba's party and a coalition partner cut the draft budget for the next fiscal year by $2.30 billion, in an effort to rein in state finances while accepting demands from opposition parties for spending measures.

The draft budget, submitted to the parliament on Friday, marks the first time since 1996 that the government will be forced to change its initial budget allocation, underscoring the diminished political influence of Ishiba's coalition camp.

The budget for the fiscal year that starts in April is estimated at 115.2 trillion yen ($769.2 billion) now, down by 343.7 billion yen from the initial plan.

New bond issuance will be reduced marginally, by 1.9 billion yen to 28.6 trillion yen, in a relief for the Japanese government bond market already rattled by recent large price swings.

The draft budget is set to pass parliament's lower house before the new fiscal year starts in April, as the opposition Japan Innovation Party (JIP) has promised to support the bill after Ishiba's coalition agreed to accept its main demands.

The revised budget will include higher household subsidies to ensure free school education as demanded by the JIP, as well as a higher threshold for tax-free income that would result in a drop in tax revenue worth 621 billion yen.

But higher spending and reduced tax revenue will be filled by a reserve fund earmarked for emergencies and other funds that have not been fully utilised for designated policy purposes.

Pressure for fiscal expansion will grow in the run-up to an upper house election in July, as Ishiba's coalition is likely to come up with fresh spending plans to attract voters, analysts say.

At more than twice the size of its economy, Japan's public debt is by far the worst in the industrialised world.

($1 = 149.7600 yen)

(Reporting by Makiko Yamazaki; Editing by Himani Sarkar)

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