UPDATE 1-Moody's: Japan political impasse a concern for debt outlook


* Japan govt still needs to pass deficit-funding bill

* Low JGB yields support stable sovereign outlook

* Govt still has time to lower debt, deficits

(Adds direct quote, details) By Stanley White

TOKYO, Oct 12 (Reuters) - The stand-off between Japan'sgovernment and opposition parties is a concern as it has stalledimportant legislation needed to fund government spending, creditrating agency Moody's Investors Service said on Friday.

Japanese policy making has ground to a halt since the end ofthe regular session of parliament last month due to a standoffbetween the government and the opposition.

This has delayed a bill that is crucial to funding thebudget for the current fiscal year and could delay thegovernment's response to a slowing economy.

Japan's politicians still have some time to bring down debtas government bond yields are likely to remain low and thecurrent account balance is likely to remain in surplus for thetime being, Moody's senior vice president and regional creditofficer Tom Byrne told reporters.

"Confidence in Japan's government is tenuous," Byrne said.

"Tight Japanese government bond yields are likely to remain,and this gives the authorities some time to reduce deficits."

Moody's rates Japan at Aa3, three notches below the top AAArating, with the outlook at stable.

Legislation needed to sell bonds for this fiscal year'sbudget is in limbo. Opposition parties, who control the upperhouse and can block legislation, have been stalling to force thegovernment to dissolve the lower house and call an election.

Without the bill, the government could run out of money bythe end of November.

Moody's will monitor these developments, but there areseveral factors that support Japan's public debt and the ratingagency's stable outlook, Byrne said.

Japan has already been hit by a string of credit downgradesbecause of concerns that it was not doing enough to curb itsdebt burden, the world's largest at twice the value of itsannual economic output.

Still, Japanese investors' home bias for JGBs has increased,said Byrne, who is visiting Japan for the International MonetaryFund's annual meeting.

Domestic investors hold 91.3 percent of outstandinggovernment debt, according to Bank of Japan data.

Japan's holdings of investments overseas means that thecurrent account balance is likely to remain in surplus for thenext five years, which also supports Japan's public debt burdenbecause it means Japan is a net creditor to the world, Byrnesaid.

The Bank of Japan, like central banks in the United States,Europe and Britain, has been expanding its balance sheet bypurchasing government debt to keep yields low and supporteconomic growth.

Byrne said he underestimated how active the BOJ would bewith its asset purchases, which is a positive for Japan'soutlook.

However, central bank purchases of government debt is notthe ultimate solution to the current economic malaise and thatgovernments need to take steps to boost growth, Byrne said.

(Editing by Simon Cameron-Moore)

((stanley.white@thomsonreuters.com)(+81 3 6441 1984)(ReutersMessaging: stanley.white.reuters.com@reuters.net))