Japan prime minister rejigs cabinet, juggles yen, debt, economy

Japanese prime minister Naoto Kan kept allies in key posts in a cabinet reshuffle on Friday, signalling he plans to press ahead with efforts to curb a huge public debt as he struggles with a strong yen and weak economy.

Kan, aware a fragile economic recovery could complicate those efforts, will instruct the new cabinet to compile an extra budget for the current fiscal year to March 31, Kyodo news agency reported.

But Kyodo said the funds will have to be found without issuing more government bonds. That means the government will have to dip in reserves, special accounts and surplus funds from last year's budget.

Kan retained finance minister Yoshihiko Noda, who earlier this week oversaw Japan's first intervention in the currency markets in six years to stem a rise in the yen and protect the export-reliant economy.

Noda said Japan was ready to intervene again if needed, but added Tokyo must work to gain global understanding about its actions, which have sparked criticism from foreign policymakers and raised worries about competitive devaluations.

"I'm aware that there are various opinions. But Japan's stance is that a prolonged yen rise is undesirable as the economy remains in a severe situation with ongoing deflation," he told reporters ahead of his reappointment.

The Democratic Party of Japan (DPJ) swept to power a year ago promising change after more than 50 years of almost non-stop rule by the conservative Liberal Democratic Party (LDP), but floundered under the indecisive leadership of Kan's predecessor Yukio Hatoyama, who quit in June after his ratings nosedived.

Kan, who took office in June as Japan's fifth prime minister in three years, defeated rival Ichiro Ozawa in a party leadership vote on Tuesday. Ozawa, a scandal-tainted strategist known for shaking things up, favours spending to stimulate the economy if needed, even if that means increasing public debt.

Ozawa's followers were unlikely to be happy with their lack of representation in the cabinet, but analysts said the wily strategist was likely to remain in the shadows -- for now.

Kan must now try to unify his fractured party, where nearly half of the lawmakers voted for Ozawa in the leadership election, as he strives to curb the yen's rise and escape deflation despite the huge public debt.

"This is a new beginning for the Kan administration. The line-up of this reshuffle is one that will drive reform and will open a new path for Japan, which is in a difficult state," chief cabinet secretary Yoshito Sengoku said.

Concerns over the government's performance were underscored by a Reuters poll of Japanese retail investor sentiment which showed that 52 percent of respondents felt the political situation had worsened since the DPJ took office.

In a nod to party unity, Kan picked Ozawa backer Banri Kaieda as economics minister and a Hatoyama ally as trade minister.

Some analysts, however, doubted Kaieda would be able to exercise much influence on fiscal policy as Japan tries to rein in public debt already twice the size of its $5 trillion economy.

"Fiscal reform is a matter for the finance minister, who is Noda, and they will stick to their reform stance," said Tsuneo Watanabe, a senior fellow at the Tokyo Foundation, a think tank.

Kan ally Koichiro Gemba becomes the new national strategy minister while keeping his post as the party's policy chief.

Kan has pledged to cap new bond issuance for the fiscal year from next April at this year's level around 44 trillion yen ($512.7 billion).

He also has said he would revise spending pledges made when his party swept to power if funds fall short, and wants to debate a rise in the 5% sales tax to fix state finances.

Kan has said he would consider an extra budget for this fiscal year if the economy stumbles, and is expected to struggle to cap spending given the rising social security costs of Japan's fast-ageing society.

"The room for manoeuvring for Kan is very limited. For the long term, fiscal consolidation would have a high priority but near term, to the extent that there still exists downside risk to the economy, he has been saying the government should do everything to support the economy," said Masaaki Kanno, chief economist at JP Morgan Securities Japan.

"But the size of the extra budget will be very small."

Kan appointed a new foreign minister at a time of tensions with China over a territorial dispute and potential friction with the United States over a US military base in southern Japan.

Seiji Maehara, outgoing transport minister and known as a proponent of strong ties with security ally Washington, will take over as foreign minister from Katsuya Okada.

Okada, a policy maven with a Mr Clean image who has been critical of Ozawa, takes over as secretary-general, the party No 2, as the government struggles with a divided parliament where the opposition can block bills.