Sept. 15 (Bloomberg) -- Shinzo Abe, who is likely to be Japan's next prime minister, has an economic policy that might be boiled down to three words: Do no harm.

Abe, who is set to replace Junichiro Koizumi at the end of the month, is stressing cutting government spending without raising the consumption tax to pay off the world's largest public debt. He has also urged the Bank of Japan to move slowly in raising borrowing costs, to avoid impeding growth.

He will inherit an economy headed for its longest expansion in 60 years. The central bank raised interest rates in July for the first time in almost six years from near zero, judging that seven years of deflation were at an end. The rate increase boosted the cost of servicing Japan's debt.

``Abe is taking a measured approach,'' said Paul Sheard, chief economist at Lehman Brothers Japan Inc. ``The economy is in sort of a gray area now. It's far too premature to raise the consumption tax. He's keeping his distance from the debt- consolidation camp.''

As chief cabinet secretary, Abe, 51, is the government's top spokesman and its most visible official after Koizumi. He holds a wide lead in polls for the ruling Liberal Democratic Party's leadership contest on Sept. 20: More than 70 percent of the party's parliament members may vote for Abe over Foreign Minister Taro Aso and Finance Minister Sadakazu Tanigaki, the Yomiuri newspaper said on Sept. 12, citing its own survey.

Koizumi's Support

Koizumi said on Sept. 9 in Helsinki that he will vote for Abe. The winner will become prime minister because of the LDP's parliamentary majority. The legislature votes on Sept. 26.

``It's a coronation, not an election,'' said Jesper Koll, chief economist at Merrill Lynch & Co. in Tokyo.

Once he takes office, though, Abe ``will have to deal with difficult fiscal consolidation issues,'' Koll said.

The government said in July it must find 16.5 trillion yen ($140 billion) to balance the budget by 2011 and stop the expansion of public debt, which it forecasts will amount to 151 percent of gross domestic product by March. Spending cuts would account for as much as 14.3 trillion yen of the total.

A drive to reduce expenditures might run into the rising costs of supporting Japan's aging population, the oldest in the world. Welfare and medical costs will increase by 550 billion yen next fiscal year, according to the Finance Ministry. Tanigaki has advocated raising the consumption tax to 10 percent from the current 5 percent by the middle of next decade; Abe declines to specify whether the tax should be raised.

`A Comprehensive Approach'

``As social welfare costs rise every year, we have to take a comprehensive approach to dealing with it, and discuss fundamental tax reform,'' Abe said on Sept. 5. ``We must cut spending'' before raising taxes.

Officials are counting on economic growth to make their task easier. The economy grew 3.2 percent in the fiscal year ended March 31, the fastest pace in 15 years, and tax revenue will rise 4.3 percent to 46 trillion yen in the current year, according to government estimates.

Carl Weinberg, an economist at High Frequency Economics in New York says that isn't enough, given the rising debt. Interest payments on government bonds and debt redemption costs will surge 10 percent to 20.7 trillion yen next fiscal year, the government said on Aug. 30.

Debt Trap

``The economy is on the verge of falling into a debt trap from which it can never escape unless the government starts raising taxes and cutting spending at once,'' Weinberg said. ``Japan's new government will have to take some tough measures in less-than-ideal times.''

Abe is unlikely to be any more specific on taxes ahead of elections for the parliament's upper house in July. Koizumi led the LDP to a landslide victory in September 2005, the first election in three in which the party gained seats, putting pressure on his successor to build on the gains next summer.

Once in office, Abe may also prod the Bank of Japan to refrain from raising rates to help growth. He said on Sept. 6 that the central bank should keep rates ``at extremely low levels to maintain this accommodative financial environment.''

The Bank of Japan raised the key interbank overnight loan rate to 0.25 percent on July 14, its first rate increase in almost six years of battling deflation.

Abe ``prefers higher economic growth to achieve his policy objectives, such as budget consolidation,'' said Susumu Kato, chief strategist at Calyon Securities in Tokyo. ``He would not like the BOJ to raise the interest rate any time soon.''

Robert Feldman, chief economist at Morgan Stanley Japan Ltd. in Tokyo, said Abe, like Koizumi, will talk about tax increases only in terms of ``a last resort.''

``This is the position Abe has taken, it's the position Koizumi has taken,'' he said. ``They don't want to go to the voters and say please allow a tax hike until they've done everything they can possibly do to cut waste in the government.''

To contact the reporter on this story: John Brinsley at jbrinsley@bloomberg.net

Last Updated: September 14, 2006 20:20 EDT