Japan’s political gridlock threatens to curtail the government’s ability to apply fiscal stimulus as a rebound falters in the world’s third-largest economy.

Opposition parties in the upper house of parliament stymied legislation approved in the lower house Aug. 28 that enables the issuance of 38.3 trillion yen ($490 billion) of deficit- financing bonds, seeking to force Prime Minister Yoshihiko Noda into an early election. The government could hit a spending ceiling as soon as October, according to the Finance Ministry.

The freeze may suspend outlays from this year’s budget for the first time, according to Goldman Sachs Group Inc., and limits Noda from proceeding with the supplementary spending package he mooted in July. With economists increasingly seeing an economic contraction this quarter, the deadlock adds to risks facing global expansion that include a so-called fiscal cliff of spending cuts and tax increases in the U.S. at year-end. 

“The impasse on deficit-covering bonds may delay the compilation of a stimulus package and would be a drag for the economy,” said Taro Saito, Tokyo-based director of economic research at NLI Research Institute and a past winner of a Japan Center for Economic Research award for accuracy in forecasting. “This is not as severe as the U.S. fiscal cliff but could be said to be Japan’s fiscal slope.”

Japanese stocks headed for a fourth day of declines, the longest losing streak in more than a month, on pessimism about the global expansion. The Nikkei 225 Stock Average was down 0.1 percent as of 11:24 a.m. in Tokyo. The yen was little changed at 78.37 per dollar, about 4 percent from its postwar high, underscoring the threat to exporters of a strong currency.

Besides exchange-rate appreciation, Japan’s manufacturers are facing diminishing demand abroad, hurt by the European crisis, China’s slowdown and stunted American growth. A government report yesterday showed capital spending rose 6.6 percent in the second quarter from a year before, less than the 7.8 percent median estimate in a Bloomberg News survey.

Yesterday’s report spurred economists to cut forecasts for Japan’s second-quarter gross domestic product, initially reported at an annualized 1.4 percent gain. Officials may pare that calculation to 0.9 percent on Sept. 10, according to the median of seven projections in a Bloomberg survey.

Bank of America Merrill Lynch, Credit Suisse Group AG and BNP Paribas SA see a contraction in GDP this quarter, the first slide since back-to-back declines in the first half of 2011, when Japan was hit by the record earthquake and tsunami.

The Japanese fiscal impasse is an echo of political struggles in the U.S., where Republicans and Democrats have failed to agree on a phased plan to rein in the budget deficit. The split leaves the economy facing some $600 billion of pre-set tax increases and spending cuts at the end of the year.

U.S. manufacturing stagnated in August after shrinking the previous month, a Bloomberg survey indicated before an Institute for Supply Management Inc. report today.

In the euro region, producer prices probably rose at a slower pace in July, gaining 1.6 percent from a year before, a separate survey showed.

In the Asia-Pacific region, Australia’s central bank today is projected to leave its benchmark interest rate at 3.5 percent even after signs the nation’s mining boom is decelerating. BHP Billiton Ltd. (BHP), the world’s biggest miner, last month mothballed projects valued at more than A$50 billion ($51 billion) by Credit Suisse Group and Deutsche Bank AG. 

(Bloomberg)