After months of hardball with the ruling camp, Liberal Democratic Party President Shinzo Abe hinted he will cooperate with the Democratic Party of Japan in passing a critical bond-issuance bill.

“We will agree to deliberate” with the DPJ on certain key issues, including legislation to issue bonds necessary to fund the fiscal 2012 budget, Abe said Thursday at a news conference in Tokyo.

The main opposition party had insisted Prime Minister Yoshihiko Noda first set a date for dissolving the Lower House in exchange for its support over the bill in the Diet, but Abe’s remarks suggest LDP leaders now plan to get the bond issue out of the way before pressing Noda to call a snap election.

Unable to issue some ¥38.3 trillion worth of new bonds, roughly 40 percent of the current fiscal budget, the government is quickly running out of funds.

“If we can’t enact the bill in November, it will be impossible to issue government bonds from December,” Finance Minister Koriki Jojima stressed Monday, warning the current Diet impasse over the legislation “could bring instability to the market.”

“Domestic and overseas investors could regard Japan as having trouble securing its public finances,” Jojima said, calling on the opposition, which controls the Upper House and can thus block government bills, to enter into constructive discussions with the Democratic Party of Japan-led ruling coalition.

But despite Abe’s comments, the bill’s passage remains unclear since some LDP members are continuing to insist that Noda swiftly call a general election in exchange for their cooperation.

In an unprecedented move, the Upper House blocked Noda from delivering a key policy speech Monday when the Diet opened, and the opposition renewed its offensive during Friday, holding an emergency plenary session to question the prime minister over the gravity of the Upper House censure motion he was slapped with in August, as well as his commitment to dissolving the lower chamber.

It was the first session of its kind in almost 30 years.

But with neither the opposition nor Noda willing to cede any ground, the stalemate is creating a bleak outlook for prerequisite deliberations on various legislation, including the bond bill, to begin in the House of Councilors.

“Ignoring the Upper House, which held the most recent national election and therefore reflects the people’s will (more than the Lower House), is the same as ignoring public sentiment. Aren’t you ashamed of yourself?” LDP Upper House lawmaker Tetsuro Nomura chided Noda during the session Friday. “If you really take the censure motion to heart, the only thing you can do is to resign en masse (with the Cabinet), or dissolve the Lower House.”

“The fact that a censure motion was passed in the Upper House is deeply engraved into my heart,” Noda retorted. “I take it seriously (and) will devote myself to my duties to make sure that something like this never happens again.”

Despite the opposition onslaught, Noda simply reiterated his intention to tackle the most pressing problems on his plate, and dodged calls to clarify when he plans to call a Lower House poll.

The government, however, is navigating treacherous waters.

It was initially feared that Noda’s administration could run out of cash by the end of October, although this worst-case scenario was averted by putting off certain payments and subsidies.

The stop-gap measures include holding back tax revenues scheduled to be dispersed among local governments, including a ¥4 trillion payment that had been slated for Friday. The government has also been forced to postpone other public-sector payouts, including to national universities.

If these extreme steps don’t suffice to make ends meet until the bond-issuance bill is passed, the consequences will be dire.

Cash-strapped municipalities could delay public projects, including repairs to buildings and roads, and begin canceling local events. While interrupting payments to public servants is considered unlikely, local governments could be forced to turn to private-sector loans on which they would have to pay interest, further draining their shaky finances.

“This is an extremely grave issue” that could have very serious repercussions on people’s lives,” a group of governors and local government heads said in a joint statement released Tuesday.

The banking sector is also bracing for violent interest rate fluctuations if the bond-issuance bill remains in limbo. Supply shortages followed by a sudden issuance of bonds would create instability, as well as tarnish Japan’s reputation among overseas investors, banking executives warned Finance Ministry officials last week.

Concerns over the bill are not limited to domestic players, however. At its annual meeting in Tokyo last month, the International Monetary Fund said Japan’s fiscal predicament could turn into a downside risk for the entire global economy.

“Securing funding for this year’s budget and further progress in medium-term fiscal consolidation are needed,” the IMF noted.

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