Factbox: Policy implications of change of Japan leadership

TOKYO (Reuters) - Japanese Prime Minister Yukio Hatoyama and his ruling party No.2 quit on Wednesday to try to boost the party's chances in an election next month, less than a year after sweeping into office with promises of change.

The latest political turmoil could delay government efforts to thrash out plans to cut huge public debt and a strategy to engineer growth in an aging society.

But if fiscally conservative Finance Minister Naoto Kan takes the helm, as many expect, there may be a greater chance of bolder steps to rein in debt, including a pledge to consider raising the 5 percent sales tax after the next general election, due by 2013.

Following are some implications of a change in leadership on different areas of policy.

MONETARY POLICY

The BOJ, which has called for the need to set up a credible plan to rein in Japan's huge public debt, is worried that the policy stalemate will delay the government's crafting of the fiscal reform plan initially set for release later this month.

But the political vacuum also gives the central bank some breathing space and relieves it from government pressure for further action to beat deflation, at least until after the July upper house election.

The BOJ sees little need to ease policy and feels it has done enough for now by outlining last month a loan program aimed at supporting industries with growth potential.

Unless sharp yen rises or a plunge in stock prices risk hurting business sentiment and the economic outlook, the BOJ is seen holding off on easing at least for the next few months.

FISCAL POLICY

Debt problems in the euro zone have turned a spotlight on Japan's indebtedness, which the International Monetary Fund put at 217.7 percent of gross domestic product last year, far worse than Greece's debt-GDP ratio of 115.1 percent.

Most of Japan's debt is held by domestic investors, who are less sensitive to credit rating agency downgrades than foreign investors, but that is slowly changing as the population ages and household savings fall.

Politicians have so far sent mixed messages on how far they will change fiscal policy. But the government may accelerate fiscal reforms if the ruling party picks Kan or National Strategy Minister Yoshito Sengoku as its next leader.

The two have been leading advocates of fiscal reforms, including discussing a hike in the consumption tax.

DIPLOMACY, SECURITY POLICY

Regardless of who is at the helm, Japan's foreign and security policies are unlikely to shift drastically.

The Democrats took power promising to steer a diplomatic course more independent of close ally the United States, but Hatoyama's efforts to do so hit a roadblock when he failed to find an alternative to keeping a U.S. Marine airbase on Japan's southern Okinawa island.

Tokyo and Washington have agreed basically to implement a 2006 agreement to shift the Marines' Futenma airbase to a less crowded part of Okinawa, host to about half the U.S. troops in the country. But local opposition clouds the outlook for implementation, and experts worry that Hatoyama opened a Pandora's box by fanning anti-base sentiment that could undermine the 50-year-old alliance.

The next prime minister will also likely keep stressing the need to deepen ties with Asia including China, given Japan's increasing reliance on the region for economic growth.

CLIMATE POLICY

Hatoyama's government has approved a 2020 goal to cut Japan's greenhouse gas emissions by 25 percent from 1990 levels premised on an international framework in which major emitting countries agree with ambitious targets.

The powerful lower house passed a climate bill including the goal and a short-list of domestic measures to achieve it, but upper house passage of the bill could be delayed given a tighter schedule after Hatoyama's resignation.

Even if it doesn't get passed, the DPJ still holds power and is expected to compile a bill with the same goal, though it may be may be changed if it needs to appease new coalition partners.

POSTAL REFORM

It is unclear whether parliament will now have the time or enough support to enact a bill to scale back postal privatization by the end of the current parliament session in view of the political turmoil.

The fate of Japan Post could sway the financial markets and industry because the entity, which has retail banking and insurance services, is the world's largest financial conglomerate with financial assets of about 300 trillion yen ($3.3 trillion).

The United States and Europe last month said draft postal reform legislation had not addressed their concerns about what they see as the preferential treatment that Japan Post receives compared with private-sector companies.

Shizuka Kamei, the banking minister from a tiny ruling coalition partner, said the bill must be enacted in the current parliament session, set to end on June 16, Jiji news agency reported on Wednesday. But the process of picking a new prime minister will take up time before the session ends.

It is also unclear if the Social Democrats, whose support is essential for the bill to be approved in an upper house committee, will back the legislation after Hatoyama fired its party chief over a U.S. airbase dispute. The bill passed the lower house on May 31.

(Compiled by Leika Kihara, Hideyuki Sano, Charlotte Cooper, Yoko Nishikawa and Risa Maeda; Editing by Hugh Lawson)