* JGBs to make up tax shortfall will lean to short-term debt
* Moody's: widening in Japan CDS spread not 'turning point' (Adds comments, details market reaction in paragraphs 3-9, 13)
By Masayuki Kitano
TOKYO, Nov 16 (Reuters) - Japan is likely to rely more on short-term debt issuance later this fiscal year to offset a possible tax revenue shortfall, a Ministry of Finance official said on Monday.
The ministry is due to issue 132.3 trillion yen ($1.5 trillion) in JGBs to institutional investors through regular auctions in the fiscal year to the end of next March, a rise of more than 24 percent from last fiscal year.
Investors have been bracing for debt issuance to rise further this fiscal year, and one focal point is how the extra amount will be allocated along the yield curve, which has steepened this year on concerns about Japan's growing debt burden.
"We still have to finance the coming shortfall in tax revenue, which may happen in the course of the fiscal year," Masaaki Kaizuka, director of debt management at the ministry, told a Europlace forum.
"Because the remaining period to the end of the fiscal year is very short, we are inclined more to the short end of the curve," Kaizuka said. Kaizuka added that generally the MOF intends to lengthen the average maturity of its debt to reduce refunding risk.
"If the situation is normalised, we will go back again to prolong the maturity. Maybe we will reallocate the increased short-end issuance to the long end of the curve," Kaizuka said.
JGBs showed little reaction to Kaizuka's remarks. On the day, the benchmark 10-year JGB yield dipped half a basis point to 1.330 percent, matching a four-week low touched on Friday, and down from a five-month high of 1.485 percent hit last week.
"It is not anything to be surprised about," said Mari Iwashita, chief market economist for Nikko Cordial Securities, adding that there has been talk in the market that any extra issuance later this fiscal year may be tilted toward short-term treasury bills.
Last week, five-year credit default swaps (CDS) on Japan's sovereign debt widened to around 77 basis points, the highest since April, from just 45 basis points three weeks earlier, as some investors bet that Japan's worsening finances could hit its credit rating and prompt funding troubles.
Moody's Investors Service does not think the recent widening in Japan's sovereign CDS spread signals a "turning point" in the finance ability of Japanese government bonds, a Moody's official said on Monday.
Thomas Byrne, senior vice president at the rating agency, said the signals the CDS market sends out do not always reflect the credit fundamentals of an issuer.
"We don't ignore it. We think the CDS market at times provides a signal. But I think more often than not as we sort through this financial crisis, the CDS market, the signals it sends, do not really reflect on the credit fundamentals of an issuer," Byrne said.
Finance ability refers to a government's ability to finance its deficits without crowding out the private sector, and the willingness of the market to provide financing.
In May, Moody's downgraded Japan's foreign currency rating to Aa2 from AAA, but raised the domestic debt rating to Aa2 from Aa3. The outlook in both cases was stable. (Editing by Hugh Lawson)