TOKYO - New Japanese Prime Minister Naoto Kan, seeking to lay the groundwork for a future sales tax rise, warned on Friday that the country risked defaulting on its borrowing if it failed to rein in its massive public debt.
Kan, who took over the nation's top job after his unpopular predecessor quit abruptly last week, has made tackling a public debt that is already twice the size of Japan's GDP a top priority amid market concerns about sovereign debt risk.
"We cannot sustain public finance that overly relies on issuing bonds," Kan told parliament in his first policy speech.
"As we can see in the euro zone confusion that started from Greece, there is a risk of default if the growing public debt is neglected and if trust is lost in the bond market."
Kan spoke hours after his banking minister Shizuka Kamei -- an advocate of big spending, said he would quit the cabinet, improving the chances Kan can forge ahead with fiscal reform.
The departure of the outspoken Kamei, sparked by a spat over a controversial bill to roll back postal privatization, removes one obstacle, but how aggressively Kan can implement fiscal reforms will depend on the results of an upper house election, likely on July 11.
Support for the Democrats, who must win the July vote, has jumped since Kan took over, and Kamei's resignation could be another plus, analysts said.
"It was a bit unusual for somebody from such a tiny political party to have this much importance, and with him gone the Kan administration is likely to strengthen its foundation going into the election," said Nagayuki Yamagishi, a strategist at Mitsubishi UFJ Morgan Stanley Securities
"This could perhaps even lead to Kamei's party leaving the coalition -- and while this might seem like political instability to some foreign investors, this will really allow Kan's government a chance to stabilize."
PNP Secretary-General Shozaburo Jimi, an upper house lawmaker, was expected to be given the portfolio, since Kamei's small People's New Party (PNP) remains in the ruling coalition.
National Strategy Minister Satoshi Arai told reporters the government was aiming to compile a medium- and long-term plan for reining in debt by June 22 at the latest, and that he wanted to base the program on capping government bond issuance at 44.3 trillion yen ($484.6 billion) in the year to March 31, 2012.
Kan, Japan's fifth premier in three years, has called for a bipartisan debate on raising Japan's 5 percent sales tax to help fund bulging social welfare costs in an aging society, while Kamei has been cautious about such a move.
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