TOKYO, Nov 2 (Reuters) - Japan looks poised to avoid falling off its own version of a 'fiscal cliff' after the main opposition party signalled it will no longer hold a critical deficit financing bill hostage to its push for an early election.
The government has warned that without the bill needed to borrow nearly $480 billion and cover some 40 percent of budget spending, it will run out of cash by the end of this month just as the economy stands at risk of sliding into recession.
The opposition has used its control of the upper house to stall the bill in a bid to f orce Prime Minister Yoshihiko Noda to call an early election that he promised three months ago to push through a tax hike plan.
But with concerns rising over the dire consequences of the deadlock, opposition leader Shinzo Abe softened his position on Thursday, saying that his Liberal Democratic Party (LDP) would discuss the bill in a budget committee and debate it in a plenary session.
Earlier, the LDP had demanded a clear sign from Noda about the timing of the election before starting any discussions.
``As we are cooperating, I hope the prime minister will make good on his promise,'' said Abe, who was prime minister in 2006-2007 and looks set to return to power after the polls.
A compromise in Tokyo would bring some relief for global markets labouring through Washington's fiscal woes and Europe's debt crisis.
Gripped with uncertainty over the tight race for the U.S. presidency and China's once-a-decade change of leadership, investors could do without fears of the world's third largest economy being pitched into a self-inflicted funding crisis.
Commentators and analysts took the shift by the LDP as a sign that the funding crisis can be resolved during the current parliament session, which ends on Nov. 30.
``This change in Abe's stance has increased the chances that the deficit financing bill will be passed by the end of this month,'' said Takuji Aida, senior economist at UBS in Tokyo.
The LDP may have changed tack for fear that playing hardball when the economy was so vulnerable could make voters think twice.
``The LDP is more popular than the Democrats, and the LDP feels it needs to show that it is a responsible party that can manage the government,'' said UBS's Aida.
A senior LDP member told Reuters the party could decouple passage of the finance bill from its push for the lower house election, which opinion polls show LDP should win well ahead of Noda's Democratic Party of Japan (DPJ).
``We are not opposed to the entire bond issuance bill, we are opposed to wasteful spending,'' he said.
The LDP official, who spoke on the condition of anonymity because of the sensitivity of the matter, also said that despite its public calls for an election this year, the LDP could benefit from a few months delay. Otherwise, polls for the lower house are not due until August next year.
``For us, April would be best,'' the official said, explaining that then new government would have just the right momentum to win a majority in an upper house election due in July, pu tting an end to the ``twisted parliament'' that has dogged Noda and his predecessors.
MAYBE NOT AS BAD AS IT SEEMS
The risk that Japan could lurch over its ``fiscal cliff'' -- a term coined to describe massive tax hikes and spending cuts that could hit the United States next year -- has prompted fresh warnings from rating agencies that a prolonged political gridlock could prompt credit downgrades.
Japan's debt burden, at twice the size of its economy, is the highest in the developed world. But a vast pool of domestic savings and a strong home bias of its investors have allowed it to comfortably finance that debt at low cost, making any funding crunch appear a distant rather than imminent risk.
But given the fragility of the global economy, the risk has nevertheless has become a talking point ahead of the Group of 20 finance chiefs Nov. 4-5 meeting in Mexico on Nov. 4-5.
Sensing the heat, the government has said the bill's passage was an absolute priority and Vice Finance Minister Tsutomu Okubo told Reuters in an interview on Thursday that the government was willing to make concessions to make it happen.