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UPDATE 1-Japan drafts record budget as PM battles scandal
(For more on Japanese politics, click on [ID:nPOLJP])
* Cabinet OK's 92.3 trln yen budget, 44.3 trln yen new bonds
* PM Hatoyama vows to do his best despite funds scandal
* Ratings may hold key to PM future ahead of election
By Tetsushi Kajimoto and Stanley White
TOKYO, Dec 25 (Reuters) - Japan approved on Friday a record budget for next year that will inflate the country's already huge debt by $484 billion, as the prime minister vowed to battle on in the face of a growing scandal and sliding poll ratings.
With tax revenues sliding since the financial crisis erupted, the government has ditched a key campaign pledge to voters and tapped cash reserves to limit new borrowing at 44.3 trillion yen, a level already worrying bond markets as public debt nears 200 percent of GDP.
Prime Minister Yukio Hatoyama faces an upper house election next year so some analysts say his coalition may yet be tempted to spend more to prop up the economy, which has only recently emerged from Japan's worst recession since World War Two. [ID:nT40621] ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ For more stories on the Japanese economy click [ID:nECONJP] Graphic on Japan voter support: r.reuters.com/myv63g ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Hatoyama, whose Democratic Party ousted its long-dominant conservative rival in August, repeated his determination to stay on the job despite Thursday's indictment of two former close aides over false political funding records.
"I would like to brace myself, correct what needs to be corrected, and do my best," Hatoyama told reporters on Friday, the 101st day of his administration.
"The Japanese people may still think it is hardly possible for me to have not known (about the incident) but I told everything honestly, and I hope they will understand as much as possible."
Japanese media, however, said Hatoyama -- Japan's fourth prime minister in three years -- might have to quit if voters find his explanations and his leadership weak.
The Democrats took power pledging to put policy-making in the hands of politicians rather than bureaucrats, eradicate wasteful spending, and focus spending on consumers instead of the more business-focused policies of the ousted Liberal Democratic Party.
But polls show voter support for the government sliding below 50 percent from initial highs over 70 percent, as doubts have grown about Hatoyama's ability to make tough decisions on the economy and diplomacy.
As well, concern simmers that political mastermind Ichiro Ozawa, a former leader and now the Democrats' No. 2 executive, is running the show.
Caught between campaign pledges to give more cash to consumers to boost growth and the reality of plunging tax revenues, Hatoyama has jettisoned a key pledge to cut petrol taxes.
Hatoyama has said he would keep another promise to pay child allowances to households regardless of income levels.
"Although cuts in public works spending are planned, they are likely to be more than offset by child allowances. Overall, the budget will likely give a slight positive effect on the economy," said Yuichi Kodama, an economist at Meiji Yasuda Life Insurance.
"Rather than keeping campaign pledges, it was more important for the government to reduce its spending as Japan's fiscal conditions are reaching limits."
Finding funds to pay for costly spending programmes is expected to become more difficult, since tapping cash from special reserves is only a short-term solution.
Finance officials said about 10.6 trillion yen in such reserves would be used to balance next year's 92.3 trillion yen budget.
The government forecasts economic growth of 1.4 percent in 2010/11, which would be the first increase in three years, but analysts say policymakers need a plan to achieve sustainable growth. [ID:nTOE5BO02N]
Media polls before the indictment of Hatoyama's aides showed most voters felt that Hatoyama need not resign over the affair, which included the receipt of large amounts of money from his mother, daughter of the founder of tyre maker Bridgestone Corp (5108.T)
But sagging ratings would undermine the Democrats' chances of winning an upper house election in mid-2010, leaving them dependent on two tiny coalition partners whose conflicting views make policy-making messy. A loss could create a policy deadlock, since the upper chamber can delay bills.
Hatoyama has long been a critic of political corruption and has said in the past that lawmakers should quit if aides were guilty of misdeeds.
On Thursday, he left the door open to changing his mind and resigning but said that, for now, he believed quitting would betray voters' hopes.
"Precisely so," said the Nikkei daily in a commentary.
"The question is whether he can demonstrate leadership to carry out policies. What voters have given the prime minister is a moratorium." ($1=91.51 Yen) (Additional reporting by Yoko Nishikawa, Rie Ishiguro and Hideyuki Sano; Writing by Linda Sieg; Editing by Rodney Joyce)
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