Japan must be mindful of credit rating downgrade risk, bank lobby head says

TOKYO, July 17 (Reuters) - Japan must be mindful of the risk of a credit rating downgrade if an expansion in public debt runs out of control, the head of the country's banking lobby said, as lawmakers ramp up calls for big spending ahead of an upper house election on Sunday.

Japanese government bond (JGB) yields rose to multi-decade highs this week on market expectations that a strong performance by opposition parties calling for big spending and tax cuts could lead to an increase in Japan's already huge debt-pile.

Junichi Hanzawa, chairman of the Japanese Bankers Association, said the recent rise in bond yields likely reflected investors' anxiety over the market outlook.

"If debt expansion runs out of control, it could become difficult for the government to smoothly sell bonds in the market" as the balance of Japan's public debt is already extremely high, Hanzawa told a news conference on Thursday.

"If this happens, we must be mindful of the risk of a JGB credit rating downgrade," he said.

Recent media polls showed Prime Minister Shigeru Ishiba's ruling coalition could lose its majority in the upper house election.

Such an outcome could force Ishiba to abandon his hawkish fiscal tilt, boost spending and heed opposition calls to cut Japan's sales tax rate, analysts say.

Moody's Ratings has said an increase in tax cut pressure could be negative for Japan's rating depending on the size and duration of the cut. It rates Japan A1, the fifth-highest level.

A credit rating downgrade could trigger a triple selling of JGBs, yen and Japanese stocks - and boost the cost of dollar funding for Japanese banks.

(Reporting by Ami Miyazaki, writing by Leika Kihara; Editing by Kirsten Donovan)