TOKYO - Japan's parliament passed in November and early this month a set of bills for tax hikes and other steps to help pay for rebuilding from the devastating March earthquake, paving the way for their enactment.

Prime Minister Yoshihiko Noda's government originally aimed to pass a $157 billion extra budget in October to secure the bulk of the spending on rebuilding from the March earthquake, paving the way for full-fledged reconstruction.

Political haggling has delayed legislation, and some economists have warned that Japan's economy could slip back into a recession before public spending starts trickling in, under the weight of the yen's persistent strength and slowing global growth.

Noda cut several deals with the opposition, including the extension of the period over which borrowing for the reconstruction would be repaid and dropping plans to raise tobacco taxes, to win their backing for tax hikes from April to fund reconstruction. But with the bulk of reconstruction-related legislation passed, the opposition parties will look for opportunities to leverage their control of the parliament's upper house to force an early lower house election, which is otherwise not due until the second half of 2013. 

The cost of insuring against default on 5-year sovereign debt slipped back to just under 130 basis points at the start of December after rising to more than 150 basis points, its highest in years, in early October as global investors worried about a sovereign debt crisis.

Below are some of the key political risks to watch.    

ANOTHER PRIME MINISTER, ANOTHER BUDGET

Noda, Japan's sixth leader in five years, is trying to secure cooperation from the opposition parties which control parliament's upper chamber, and can block bills.

It is yet to be seen whether he will join the list of Japan's short-lived leaders who failed to get reforms onto the statute book, or if he can push forward key policies.  

Opposition parties have cooperated on the passage of the third extra budget, but the main opposition Liberal Democratic Party wants a snap election after this extra budget is enacted.

Noda, whose support among voters fell below 50 percent in latest opinion polls from as high as 58 percent at the end of October, has said he does not plan to call a snap election anytime soon.

While the opposition backed tax hikes proposed to fund the post-quake rebuilding, it is already bracing for a battle over Noda's next policy challenge - proposed doubling of the 5 percent sales tax to fund swelling social security costs. Opinion polls published over the past few days suggest the majority of the public opposes raising the sales tax.   

Noda has said he wants to detail the timing and scale of the proposed tax increases - according to initial plans aimed at doubling the rate by the middle of this decade - by the end of this month.

Noda is also under pressure over blunders of his defense minister and a senior ministry bureaucrat concerning  the sensitive issue of US army base in Okinawa. The minister is under pressure from the opposition and a number of ruling party members to step down, but Noda is supporting the minister charged with  reviving a long-stalled plan of the base's relocation to the island's less populated area.

To fund post-earthquake rebuilding, the government and ruling Democratic Party have agreed to raise taxes from April. It aims to effectively scale back a planned corporate tax hike for three years and to raise income and residential taxes in the future.  To limit the scope of the tax increases the government has proposed selling government stakes in some firms.

What to watch:

-- Opposition response to sales tax hike plans and government plans to ease the reconstruction tax burden via government share disposals -- including a stake in Japan Tobacco(JT), that the main opposition Liberal Democrats oppose.  

-- The shape of reform of public finance, and whether ratings agencies will deem it sufficient to stop Japan's public debt that is already twice the size of its $5 trillion economy from piling up further. Standard & Poor's has said Japan's plan to raise taxes to fund reconstruction will not help change its negative outlook.  

-- The future of defense minister Yasuo Ichikawa. If the opposition goes ahead with the non-binding censure motion and Noda decides to keep Ichikawa, the opposition may retaliate by obstructing work on tax and social security legislation.

NUCLEAR CRISIS, POWER SHORTAGES?

Tokyo Electric, the owner of the crippled Fukushima Daiichi nuclear power plant, said temperatures of all three damaged reactors are below boiling point. This brings Japan a step closer to achieving by year-end cold shutdowns, which occur when water used to cool fuel rods steadily stays below 100 degrees Celsius, preventing fuel rods from reheating.

Conservation efforts should allow Japan to avert power outages this winter but a bigger challenge looms next summer as its entire fleet of reactors could be kept idled due to public concerns in the wake of Fukushima, the government has said.

What to watch:

-- Energy supply outlook. Will Japan in fact avoid wintertime blackouts? Can Japan restart halted nuclear power plants that went under safety checks?

STRONG YEN, CORPORATE SCANDAL  

Export-reliant Japan intervened in August and again in October to stem sharp rises in the yen, but currency strategists say bids from investors spooked by Europe's inability to contain its debt crisis and worried about the health of the US economy may soon set off another yen rally.

At the end of October, Noda said he would work with the Bank of Japan to take every policy measure possible again the high yen.

In addition, corporate Japan was rocked by an M&A scandal at Olympus, in response to which Japan's ruling party said it would set up a task force to review the country's corporate governance and capital markets.  

What to watch:

-- More intervention. Japan has threatened to step into the market, but as a G7 member committed to market-determined exchange rates, it feels it cannot intervene unlimitedly.    

-- Any further policy steps to limit or to counteract the strength of the yen.

-- Investor response to the Olympus scandal, and government reaction. Will it prompt reforms of how big firms are run, or might it do lasting damage to corporate Japan's image?