FACTBOX-Japan PM's woes on economy, diplomacy and scandal

(For more on Japanese politics, click on [ID:nPOLJP])

By Yoko Nishikawa

Jan 4 (Reuters) - Japanese Prime Minister Yukio Hatoyama faces a range of hurdles including a fragile economy, a feud with key ally Washington over a U.S. military base, and a political funding scandal.

After three months in office, support for his Democratic Party-led government has slipped below 50 percent as doubts grow about Hatoyama's leadership skills, adding to his headaches ahead of an upper house election in mid-2010. [ID:nTOE5BQ01J]

Following is a list of key challenges for Hatoyama.

ECONOMY AND FISCAL WOES

The government fears a return to a recession this year, although recent economic data such as a rise in exports have eased such worries among economists. Still, persistent declines in prices and wages cloud the outlook. [ID:nECONJP]

Ballooning public debt, which is approaching 200 percent of GDP, is a key concern among investors and voters, and Hatoyama's novice government needs to balance a need for economic stimulus with a need for fiscal prudence. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Graphic on Japan fiscal pressure: r.reuters.com/paw97f Graphic on Japan voter support: r.reuters.com/myv63g ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

The government last month approved a record 92.3 trillion yen ($992.4 billion) budget for the next fiscal year starting from April 1, achieving its self-imposed cap on new bond issuance.

But given the fiscal dilemma, it abandoned a key campaign pledge to abolish a gasoline surcharge to plug a hole caused by tumbling tax revenues hit by the weak economy.

The government's efforts to cut waste have been popular among voters, but its long-waited growth strategy for the next decade aimed at creating new demand to achieve stronger growth failed to convince investors the goals are realistic. [ID:nTOE5BT059]

Very few expect a sovereign debt crisis in the world's No.2 economy, but nervous investors remain wary about possible sharp rises in government bond yields. [ID:nTOE5B7011]

TIES WITH THE UNITED STATES

The most pressing diplomatic hurdle for Hatoyama's government is resolving a dispute with Washington over a U.S. Marine airbase on Japan's southern island of Okinawa.

Washington wants Tokyo to stick to a 2006 deal to relocate the Futenma airbase to a less crowded part of Okinawa as a condition for moving up to 8,000 Marines to Guam.

Hatoyama said he would spend several more months discussing alternative locations for the base with coalition partners. But putting off a decision until May has fanned worries about his leadership and media criticism charging the Japanese leader was putting the U.S.-Japan alliance at risk. [ID:nTOE5BF07C]

LEADERSHIP QUESTION

Support for Hatoyama's government has sunk below 50 percent in recent polls from initial highs over 70 percent due to growing doubts over his ability to make tough decisions on the economy and diplomacy. [ID:nTOE5BF00M]

Adding to worries about Hatoyama's indecisiveness, concerns linger that political mastermind Ichiro Ozawa, a former leader and now the Democrats' No.2 executive, is running the show. Hatoyama has faced criticism for seeming to be under his thumb.

Falling ratings could undermine the Democrats' chances of winning a majority in the upper house election in mid-2010, leaving them dependent on their two tiny but vocal coalition partners whose conflicting views make policy-making messy.

POLITICAL SCANDAL

Hatoyama has been under fire after two of his former aides were charged over falsified political funding records, eroding voter support. Still, a majority of voters say he need not resign over the affair, partly because there is no suspicion of bribery as the funds were funnelled from Hatoyama's own family fortune.

The opposition LDP is likely to badger Hatoyama, who said he would stay as the premier, on the scandal in parliament starting this month. That could take time away from pressing matters such as the budget. But the LDP has not gained much strength since the election defeat and has funding scandals of its own.

(Editing by Jeremy Laurence)

($1=93.00 Yen)