Japanese PM pledges big change in government

TOKYO (Reuters) - New Japanese Prime Minister Yukio Hatoyama launched an untested government that aims to radically change how the country is run, wean the economy from exports and create more equal ties with close ally Washington.

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

He must also try to ensure that a nascent recovery from Japan's worst recession since World War Two stays on track despite a huge public debt.

Managing ties with the United States while charting a more independent course will be a further priority.

"I want to create the kind of politics in which politicians take the lead without relying on bureaucrats," Hatoyama, 62, wearing his lucky gold, silver and blue striped tie and signature pocket handkerchief, told his first news conference after being voted in by parliament on Wednesday.

"We might make mistakes as we do things by trial and error. We want the people to be tolerant ... We would appreciate if the people nurture the new government with patience."

Hatoyama's cabinet, a balance of former Liberal Democrats, ex-socialists and younger conservatives, will have to hit the ground running to address headaches like the budget and deeper problems like the bulging costs of a fast-aging society.

Hatoyama's choice of veteran lawmaker Hirohisa Fujii, 77, as finance minister soothed some concerns about government spending and the debt burden, but the former finance mandarin moved currency markets even before he was sworn in.

The yen jumped 0.9 percent to a new 7-month high against the dollar after he said a strong yen had merits for the economy and that recent currency moves were not rapid.

The choice of Shizuka Kamei, the outspoken head of a tiny coalition partner and an opponent of market-friendly reforms, as minister for banking and market regulation sent bank shares lower with comments on lending.

"I want to work with all my strength to rebuild Japan, which has been shaken by survival-of-the-fittest market fundamentalism," Kamei told a news conference.

INDEPENDENT DIPLOMACY

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 renegotiation of agreements on U.S. troops stationed in Japan.

"The first step will be to build a trusting relationship with President Obama," Hatoyama said. "Japan has tended to have a passive role in its relationship with the United States. We want an active role. We want the kind of relationship where we can tell one other what we are thinking frankly."

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 recession.

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

"It is not possible to restore fiscal health by sacrificing the people's livelihoods," Fujii told a news conference. But he added setting targets to restore fiscal health was a key task for a new National Strategy Bureau that will oversee the budget process and set policy priorities.

The Democrats have promised to scrap public works projects and other programs 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.

Hatoyama told reporters he thought his government could secure the 7 trillion yen ($77.54 billion) it says it needs to fund its policies in fiscal 2010/11, starting next April.

It was vital, he said, to relieve the burden on households given an uncertain economic outlook. The economy returned to slow growth in the second quarter, but still suffers a record high jobless rate and deflation.

The finance minister will likely share responsibility for the budget with former Democratic Party leader Naoto Kan, who will head the new National Strategy Bureau.

Hatoyama must also hold together an awkward coalition with the two tiny parties whose support he needs in parliament's upper house.

(Additional reporting by David Dolan; Chisa Fujioka, Yoko Nishikawa, Isabel Reynolds and Tetsushi Kajimoto; Writing by Linda Sieg)