Scenarios: Japan PM bind worsens as U.S. base row deadline nears

TOKYO (Reuters) - Japan's prime minister, his ratings diving ahead of a mid-year poll, faces a deepening dilemma over a U.S. airbase on Okinawa, although the government denied a report it had given up trying to resolve the row by the end of May.

Prime Minister Yukio Hatoyama had pledged to settle the row over the U.S. Marines' Futenma airbase by the end of the month. But with no solution in sight, speculation is simmering that he may resign ahead of an upper house election his Democratic Party of Japan (DPJ) needs to win to avoid policy deadlock.

Below are scenarios for how Japan's political saga will play out and its policy implications as the country struggles to keep a fragile economic recovery on track and rein in a bulging debt.

HATOYAMA DELAYS DECISION, LIMPS INTO UPPER HOUSE ELECTION

Prospects: Possible

Analysts say Hatoyama could still cling to his post, even if he fails to meet his self-imposed deadline, not least because the Democrats were harshly critical when two recent LDP premiers suddenly threw in the towel. He may, however, reshuffle his cabinet, including replacing Chief Cabinet Secretary Hirofumi Hirano, who was charged with working out a deal.

Hatoyama is Japan's fourth prime minister in four years.

The next deadline could well be November, when U.S. President Barack Obama will visit Japan for an Asia-Pacific leaders summit.

With public backing for the DPJ slumping and a clutch of new smaller parties likely to take votes from both the Democrats and the LDP, chances are evaporating that the DPJ will win the upper house outright majority its needs to pass bills smoothly.

Whether the DPJ and its two small partners, the conservative People's New Party and the Social Democrats, still have a shot at keeping their joint majority in the upper house is also in doubt.

If not, the Democrats would stay in power but have to either revamp the coalition or expand it, most likely by adding the New Komeito party, the LDP's ex-partner, and/or one or more of the small conservative parties that have sprung up in recent months.

At best, policymaking would remain confusing due to the coalition, in which banking minister Shizuka Kamei, head of the People's New Party, advocates big spending and wants the central bank to underwrite government bonds to fund economic stimulus.

At worst, an expanded coalition would further complicate decision-making, giving small parties excessive clout and increasing pressure to spend.

Delay on Futenma would also snarl a plan to move up to 8,000 Marines off Okinawa to the U.S. territory of Guam and probably fan U.S. doubts about its key Asian ally.

HATOYAMA QUITS

Prospects: Possible

Many voters think Hatoyama should step down if he can't meet his deadline and analysts say the possibility can't be ruled out.

Several analysts say that if Hatoyama resigns, DPJ kingpin Ichiro Ozawa, under fire over a political funding scandal, is likely to step down as party secretary-general at the same time, a move that could spark confusion in the ruling party.

Hatoyama's most likely successor would be Finance Minister Naoto Kan, a quick-tempered former health minister who has in the past pressed the central bank to do more to fight deflation.

Kan has been more positive than Hatoyama about a future rise in the 5 percent sales tax to fund bulging social welfare costs.

Analysts say, however, that replacing Hatoyama would probably not be a game-changer for the election, although dumping both the prime minister and Ozawa -- whose image as an old-style fixer is a liability -- might win back some independent voters.

That means the outlook for post-election policy confusion could be much the same as if Hatoyama stays on.

HATOYAMA BROKERS A DEAL, REPAIRS IMAGE

Probability: Low

Cabinet members have been trying to redefine what "resolving" the problem means, suggesting not all details need to be decided.

The United States wants to go ahead with a 2006 agreement to shift Futenma's facilities to a site off Camp Schwab, another Marine base in a more remote part of Okinawa.

Hatoyama wanted to shift some Marines to the tiny island of Tokunoshima, northeast of Okinawa, while altering plans for a new runway off Camp Schwab to reduce the environmental impact.

But angered by the noise, crime and pollution they associate with the bases, tens of thousands of people rallied on Okinawa in late April to call for the base to be moved off the island, while many residents of Tokunoshima oppose accepting part of the base.

(Additional reporting by Isabel Reynolds; Editing by Jeremy Laurence)