* Assumed interest rates up for first time in 17 years
* More spending reform needed to brace for rate volatility
* Balancing budget by FY2025/26 goal not likely, analysts say
TOKYO, Dec 22 (Reuters) - Japan announced a cut in overall spending for the first time in 12 years in its fiscal 2024/25 budget, amid speculation the central bank may soon shift away from more than two decades of ultra-easy monetary policy.
The budget for the coming fiscal year that starts in April is estimated at 112.07 trillion yen ($787 billion), down 2% from the current year's initial amount of 114.4 trillion yen.
Still, the size of the budget hovers above 110 trillion yen for two straight years amid spending pressures on military outlay to deal with threats from China and North Korea and welfare costs for Japan's fast-ageing society.
The world's third-largest economy is under pressure to restore its fiscal health in the face of rising interest rates after prolonged stimulus and spending worsened the country's debts - the industrial world's heaviest public debt burden.
In estimating borrowing costs, the government adopted higher interest rates in the budget plan for the coming fiscal year, which would mark the first increase in 17 years.
The plan shows its debt dependence at 31.2%, meaning new bond sales account for one third of the budget.
More than two decades of super-low interest rates have loosened fiscal discipline in a country now saddled with public debt more than double the size of the economy as a result of rounds of fiscal stimulus.
"The bulk of spending cuts comes from reduction of COVID-led emergency reserves. Excluding such factors spending reform made little headway," said Takahide Kiuchi, economist at Nomura Research Institute.
"Policymakers must have a sense of crisis and guide responsible fiscal policy as the Bank of Japan normalises monetary policy. Unexpected rate rises would further aggravate public finances."
The Ministry of Finance raised the assumed interest rates to 1.9% from the current 1.1%, up for the first time in 17 years. The assumed rates are used to calculate the cost of interest payments.
The higher assumed rates would push up debt-servicing costs further to 27 trillion yen in fiscal 2024/25, up 7% from this year.
Analysts say it is unlikely Japan will meet its aim of swinging the primary budget balance, excluding new bond sales and debt servicing costs, into the black by the fiscal year-end in March 2026.
"What's important is to present a credible plan to restore public finances even if it causes a delay in achieving the target," Takuya Hoshino, senior economist at Dai-ichi Life Research Institute, said.
"I think they are going to review the target sooner or later," Hoshino said. "They would likely delay the PB target,"
($1 = 142.4400 yen) (Reporting by Tetsushi Kajimoto; Editing by Jacqueline Wong)
