UPDATE 2-Japan's new ruling party focuses on economic woes

Tue Sep 1, 2009 6:34am EDT

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(For more on Japan's election, click [ID:nPOLJP])

* Hatoyama says to form cabinet on Sept. 16 or 17

* Democratic Party discusses economy with BOJ's Shirakawa

* Hatoyama to meet Obama in late September - Japanese media (Adds Hatoyama comments)

By Yoko Nishikawa and Hideyuki Sano

TOKYO, Sept 1 (Reuters) - Japan's Democratic Party, fresh from a landslide election victory, discussed the country's struggling economy with the central bank and finance ministry on Tuesday as the transition to a new government stepped up a gear.

Reviving the economy is a key challenge for the Democratic Party, with unemployment at a record high and investors concerned about deflation and whether the new government will raise spending and further increase Japan's soaring public debt.

Democratic Party leader Yukio Hatoyama told reporters he would form a cabinet on Sept. 16 or 17 once parliament has formally voted him in as prime minister. Parliament will meet on Sept. 16, a senior lawmaker said.

Hatoyama is expected to head to the United States the following week to make his diplomatic debut at a U.N. General Assembly meeting and a G20 summit in Pittsburgh.

Japanese media said he would hold talks with U.S. President Barack Obama during the trip.

That meeting will be closely watched given Hatoyama has said he wants Japan to forge a more independent stance from close ally Washington, raising some concerns among investors that ties with the United States could become strained. [ID:nN31454415]

Hatoyama, who won a sweeping mandate for change in Sunday's lower house election, exchanged views on the economy with Bank of Japan Governor Masaaki Shirakawa, although neither gave details on what they discussed.

Top finance bureaucrat Yasutake Tango met members of the Democratic Party to talk about the agenda for a meeting of G20 finance ministers in London at the end of the week.

Outgoing Economics Minister Yoshimasa Hayashi warned about the risks of deflation and urged the new government to consider carefully its exit strategy from stimulus measures introduced to help Japan weather the global financial storm. [ID:nT63602]

While investors had sought a clear election outcome, uncertainty over the new government's direction has weighed on Japanese stocks .N225. The yen JPY= strengthened on Monday on the end of the political uncertainty and held its ground on Tuesday. [.T] [FRX/] FXNEWS

HIGH EXPECTATIONS OF HATOYAMA

The Democrats' historic election win over the long-ruling Liberal Democratic Party (LDP) broke a deadlock in parliament, where the opposition had controlled the less-powerful upper chamber since 2007 and could delay bills.

The Democratic victory was driven more by frustration with the LDP than broad support for the decade-old opposition, explaining a lack of post-election euphoria in the world's second-largest economy.

Still, 71 percent of voters said they had high expectations of Hatoyama, a Kyodo news agency opinion poll showed.

Japan's public debt has ballooned to 170 percent of GDP, the highest among developed nations, due to its repeated attempts to spend its way out of the economic doldrums.

Some investors are concerned about fiscal discipline under the Democrats, who have promised policies such as cash handouts for parents of young children, but the party has said it will clamp down on spending in other areas to fund its new policies.

The Finance Ministry said for the first four months of the financial year that it collected only 11.8 percent of the 46.1 trillion yen ($495.4 billion) in tax revenue it estimated for the general budget as incomes suffered from the financial crisis. [ID:nT62664]

"In the Japanese government bond market, there are concerns about a possible spike in government debt issuance," said Noriyuki Fukuda, a fixed-income strategist at Morgan Stanley.

The new government may have to craft an extra budget to cover an expected tax revenue shortfall. [ID:nT289544]

They will also need to get started on drafting the annual budget for the year from next April 1, but party leaders have said they would disregard budget requests from government ministries compiled on Monday and start them all over again. [ID:nT67167] (Additional reporting by Isabel Reynolds, Chisa Fujioka, Yoko Kubota, Rika Otsuka, Elaine Lies and Tetsushi Kajimoto; Editing by Dean Yates and Hugh Lawson)

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