Japan PM in a bind as upper house election looms

A woman sits in front of posters of Prime Minister Yukio Hatoyama at the ruling Democratic Party's headquarters in Tokyo February 22, 2010.

TOKYO (Reuters) - Japanese Prime Minister Yukio Hatoyama, his party flagging in polls ahead of a mid-year election, promised on Monday to find a way to regain public backing but said he was not considering a cabinet reshuffle now.

Only one in four voters plan to cast their ballots for his Democratic Party in an upper house election expected in July, a Yomiuri newspaper survey showed on Monday, as funding scandals and doubts about the premier's leadership erode his support.

The novice Democratic Party, which ousted the long-dominant Liberal Democrats last year, needs to win the election to avoid policy paralysis as Japan struggles to keep a fragile economic recovery on track and rein in its massive public debt.

"The view is spreading among the people that nothing has changed from before," Hatoyama told reporters.

"Fundamentally, it is important to enact the (2010/11) budget and implement one by one the policies that we promised the people in our manifesto, but that is not enough. We must accept this criticism head on and find a remedy," he said.

But he added that he was not considering shaking up his five-month-old cabinet.

Nearly 80 percent of voters in the Yomiuri poll said Ichiro Ozawa -- the Democrats' powerful secretary-general whose campaign skills have been seen as vital but who is plagued by an old-style wheeler-dealer image -- should resign over a funding scandal in which three of his aides have been charged.

Hatoyama is also in a bind over a row with close ally Washington over where to relocate the U.S. Marines' Futenma airbase on the southern island of Okinawa. He has promised to resolve the feud by May and hinted he might resign if he cannot.

During last year's election, Hatoyama raised hopes in Okinawa that the Marines' Futenma airbase could be moved off of the island, host to the bulk of 47,000 U.S. military personnel in Japan. But Washington wants to stick to a 2006 deal to shift the facility to a less crowded spot on northern Okinawa.

COMPLICATING POLICIES

Although the Democrats have a big majority in the powerful lower house, they need to win an outright majority in the upper house to break free of an awkward alliance with two tiny partners whose presence in the coalition complicates policymaking.

A ruling bloc loss could cause parliamentary deadlock, although the Democrats may be able to find other allies to cobble together a coalition majority in the chamber.

That, however, could make it even harder for the Democrats to tackle painful policy topics, including whether and when to raise the 5 percent sales tax to fund the bulging social welfare costs of Japan's aging population, said Hidenori Suezawa, chief strategist at Nikko Cordial Securities.

"Japanese government bond players would be concerned in that kind of situation as the ruling party would find it more difficult to seek financial reconstruction," he said. "Smaller parties would be reluctant to adopt policies that would make them unpopular."

But he added that bond yields were unlikely to rise soon given a healthy domestic appetite for JGBs, the bulk of which are held by Japanese investors.

Finance Minister Naoto Kan has called for the start of debate on tax reforms including the sales tax, but Hatoyama has reiterated that his government would not raise the tax before the next general election, which must be held by late 2013.

The opposition Liberal Democrats have failed to capitalize on the ruling party's woes. Only 22 percent said they would cast their ballots for the party, ousted last year after more than 50 years of almost unbroken rule.

Twenty-five percent said they would vote for the Democrats, who swept to power last August vowing to put more money in consumers' hands to boost growth, have politicians decide policies instead of bureaucrats, and cut waste.

(Additional reporting by Rika Otsuka)