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UPDATE 10-Japan finance minister resigns in blow to PM Aso
(For more stories on Japanese politics, click on [ID:nPOLJP]) (Recasts with analysts comments)
TOKYO Feb 17 (Reuters) - Japan's finance minister resigned on Tuesday after being forced to deny he was drunk at a G7 news conference, but the move may be too late to save unpopular Prime Minister Taro Aso or the long-ruling party from voters' wrath.
Shoichi Nakagawa told reporters the prime minister had accepted his resignation, just a day after Aso had asked his close ally to stay in his post despite uproar over his behaviour at a G7 gathering in Rome.
Aso picked Economics Minister Kaoru Yosano, 70, to add the job of finance minister to his current role, a choice that spelled little change in policy as the government struggles to lift Japan out of a deepening recession.
But the saga, which overshadowed a visit by U.S. Secretary of State Hillary Clinton and data showing Japan's economy shrinking at its fastest rate since the 1974 oil crisis, has dealt a huge and perhaps fatal blow to Aso and his party, analysts said.
"I think it is a further sign that the Aso administration is in its final phase," said Jonathan Allum, Japan strategist at KBC Financial Products.
"Either Mr. A will be pushed aside by his own party or he will limp on to defeat in the general election."
Aso's public support has plummeted to less than 10 percent after a string of gaffes and policy flip-flops.
Polls show his conservative Liberal Democratic Party (LDP) is in danger of losing power in an election that must be held by October.
That would end more than 50 years of almost unbroken rule and usher in a government led by the main opposition Democratic Party, which has pledged to reduce bureaucratic control of policy, reduce income gaps and adopt a diplomatic stance more independent of close ally Washington. [ID:nT372785]
Nakagawa offered earlier to step down after parliament passed budget bills, a process that could have taken weeks.
That failed to satisfy the LDP's junior coalition partner and an emboldened opposition, which both demanded he go immediately.
Yosano, a fiscal hawk who has grown flexible about spending as the recession worsens, will keep his current post and take over Nakagawa's other portfolio in charge of banking supervision.
A former rival who lost to Aso in the race to become prime minister last year, Yosano's name has also been floated as a possible new leader if the current premier is dumped. (For an analysis on Yosano, click [nT102333])
Aso, Japan's third prime minister in less than two years, is trying to get parliament to fund an immediate stimulus package and also a record $958 billion budget for the year to March 2010 to help rescue the economy from recession. [ID:nT74412]
But the political fuss is making policy implementation tough.
"Japan will have two risk scenarios -- one about a further deadlock in parliamentary proceedings with the budget and related bills, and the other about a delay in compiling an additional stimulus package -- which are related to each other," said Takahide Kiuchi, chief economist at Nomura Securities.
"If Nakagawa's resignation forces Aso to step down and call an early election, discussions about additional stimulus measures will go up in smoke."
The Democrats said Aso bore responsibility for appointing Nakagawa.
"This is not an issue that is solved with the resignation, and the Democrats will pursue this issue thoroughly," the party's No.2 leader, Yukio Hatoyama, told reporters.
At the Group of Seven news conference in Rome, Nakagawa slurred his words and appeared to fall asleep at one point.
He said he had not done more than sip some wine before the news conference and cold medicine had affected his behaviour.
"I have caused trouble to the people," Nakagawa told an earlier news conference. "I apologise for causing commotion from my careless health management."
About the only bit of good news for Aso was an invitation to meet U.S. President Barack Obama in Washington on Feb. 24, a visit that would make him the first foreign leader to meet Obama at the White House.
But in a sign that the opposition Democratic Party's fortunes were rising, Clinton was also set to meet party leader Ichiro Ozawa on Tuesday evening.
Many voters have been wary of handing the reins of government to the untested Democrats, but analysts say the LDP's missteps and disarray were convincing the public to give them a chance.
"I think more and more voters will find themselves completely alienated from the LDP and so the DPJ again scores points, not because of what they did, but because the LDP is basically falling apart," said Koichi Nakano, a political science professor at Tokyo's Sophia University. ($1=92.37 Yen) (Additional reporting by Tokyo bureau; Writing by Linda Sieg, Editing by Dean Yates)
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