Wednesday September 16, 2009

New Japan PM faces hurdles on economy, U.S. ties

By Linda Sieg and Tetsushi Kajimoto

TOKYO (Reuters) - Japan's Yukio Hatoyama was voted in as prime minister by parliament's lower house on Wednesday, ushering in an untested government that must try to revive a struggling economy and manage ties with nervous ally Washington.

Japan's new Prime Minister Yukio Hatoyama (2nd R) arrives at the premier's official residence in Tokyo September 16, 2009. Hatoyama was voted in as prime minister by parliament's lower house on Wednesday, ushering in an untested government that must try to revive a struggling economy and manage ties with nervous ally Washington. (REUTERS/Issei Kato)

Hatoyama, whose Democratic Party of Japan (DPJ) trounced the long-ruling Liberal Democratic Party in an election last month, faces pressure to make good quickly on campaign promises to focus spending on consumers, cut waste and reduce bureaucrat control over policy.

The U.S.-educated Hatoyama, 62, wearing his lucky gold, silver and blue striped tie and signature pocket handkerchief, stood and bowed after the vote.

"I have mixed feelings of excitement about changing history and the very heavy responsibility of making history," said Hatoyama, whose party ousted the LDP for only the second time since its founding in 1955.

"The fight begins now," he said as he left home earlier.

Hatoyama's cabinet, a delicate balance of former Liberal Democrats, ex-socialists and younger conservatives, must hit the ground running.

"The DPJ has got to come up with an agreed list of priorities quickly, because its manifesto is just a long laundry list," said Koichi Nakano, a professor at Sophia University in Tokyo.

"And it better not just be how they will govern differently, but actual policies," he added. "They can expect something of a honeymoon for a year, but not longer than that."

Hatoyama's choice of veteran lawmaker Hirohisa Fujii, 77, as finance minister has soothed some analysts' concerns that the government's spending programmes will inflate an already huge public debt as Japan struggles to emerge from recession and cope with the bulging costs of a rapidly ageing society.

Fujii moved currency markets even before he was sworn in, pushing the yen up 0.5 percent against the dollar by telling reporters a strong yen had merits for Japan's economy and that recent moves were not rapid.

Hatoyama's choice of Shizuka Kamei, the outspoken head of a tiny coalition partner, as minister for banking supervision and postal services has also spooked some experts worried about Kamei's opposition to market-friendly reforms.

INDEPENDENT DIPLOMACY, BUDGET BATTLES

Hatoyama's vow to steer Japan on a more independent diplomatic course has sparked concerns about possible friction with top ally the United States ahead of his diplomatic debut there next week, where he will meet President Barack Obama.

The U.S.-educated Hatoyama is expected to reassure Obama over ties and perhaps postpone calls for re-negotiation of agreements on U.S. troops stationed in Japan.

On his return, Hatoyama faces the urgent task of drafting a budget for the fiscal year from next April 1 and finding ways to plug holes in this year's budget caused by sliding tax revenues as Japan struggles out of its worst recession since World War Two.

The new government must balance the need to nurture a recovery and fund its consumer-friendly spending programmes with concerns about a public debt heading towards 200 percent of GDP.

"People aren't fools. We know that money has to come from somewhere but I just don't know where," said 50-year-old businessman Eiji Shimagami.

The Democrats have promised to scrap public works projects and other programmes they consider wasteful and use freed up cash to stimulate consumption through measures such as payouts to farmers and families with children and ending highway tolls.

The economy returned to slow growth in the second quarter but still suffers a record high jobless rate and record deflation.

The Democrats have vowed to centralise decision-making in the cabinet, and a new National Strategy Bureau will be tasked with reforming what the Democrats say is a cumbersome policy-making system that relied heavily on recommendations from bureaucrats.

That means the finance minister will likely share responsibility for the budget with former Democratic Party leader Naoto Kan, who will head the new bureau.

Kan, who battled bureaucratic corruption as health minister in the 1990s, is seen as a pragmatic force for change.

Hatoyama must also hold together an awkward coalition with the two tiny parties whose support he needs in parliament's upper house, and may face fall-out from money scandals looming over him and party No.2 Ichiro Ozawa.

Besides conservative People's New Party head Kamei, he will appoint Social Democratic Party leader Mizuho Fukushima to take charge of consumer affairs and policies to boost Japan's very low birthrate.

(Additional reporting by Isabel Reynolds, Yoko Kubota, Yoko Nishikawa and Colin Parrott)

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