Japan PM faces challenge from party kingpin Ozawa

TOKYO (Reuters) - Japanese powerbroker Ichiro Ozawa confirmed on Tuesday he would challenge Prime Minister Naoto Kan in a party vote, setting up a clash that risks creating a policy vacuum as Japan struggles with a strong yen and fragile growth.

The strife in the Democratic Party of Japan, which could split the party just a year after it took power for the first time promising change, coincides with policymakers' efforts to curb a rise in the yen that threatens economic recovery.

A Bank of Japan decision to boost a cheap loan scheme at an emergency meeting on Monday did little to weaken the yen, still hovering near a 15-year high against the dollar hit last week.

"This could be the beginning of a party split. It may not be immediate, but the confrontation is real and serious," said Koichi Nakano, a Sophia University professor.

Ozawa, 68 and known for shaking things up, announced his decision after efforts failed to avoid a showdown in the September 14 DPJ leadership vote.

"As I have said before, I have decided that although I am unworthy I would like to take part (in the race) with everyone's support," Ozawa told a news conference at party headquarters.

The winner of the race will likely become premier by virtue of the Democrats' majority in parliament's powerful lower house.

Kan is already Japan's fifth leader in three years.

Ozawa has criticized Kan for floating a possible rise in the 5 percent sales tax ahead of a July upper house election. The DPJ's poor showing in that poll cost the ruling bloc its majority in the chamber and forced the Democrats to seek opposition help to pass bills.

POLITICAL SKILLS, SCANDAL-TAINTED IMAGE

Kan reiterated on Tuesday that debate was needed on reforming the sales tax, which economists say needs to be raised to fund the bulging social welfare costs of a fast-aging society.

Ozawa wants to stick to pledges made before last year's general election to put more cash in households' hands, while Kan has signaled the need to revise the promises, given a public debt already twice the size of the $5 trillion economy.

The Democrats have stumbled on economic and diplomatic fronts, struggling to craft a plan to end decades of stagnation and straining ties with key security ally the United States.

Ozawa's admirers say the veteran political strategist's deal-making skills may be just what Japan needs to break through the political deadlock. Others say his election will likely spark confusion and worsen the policy gridlock.

"I see Ozawa's entry in the race positively. I think he is more capable and has power to take bold measures to boost the economy," Ryosuke Okazaki, chief investment officer at ITC Investment Partners, an asset management arm of Itochu Corp.

Many credit Ozawa with engineering the huge election win that swept the DPJ to power, but a majority of voters are put off by his image as a scandal-tainted wheeler-dealer.

Opinion polls consistently show that a vast majority of Japanese voters want Kan to defeat Ozawa in the leadership race.

Ozawa stepped down as party leader last year over a political funding scandal and resigned as the party's No.2 in June. He faces possible indictment if a judicial panel of ordinary citizens rules he must be charged.

Kan denied media reports that Ozawa had sought a senior party post and party and cabinet personnel changes in return for agreeing not to run in the party election.

Lawmakers close to Kan had rejected any deal, which would have prompted voter support for the party to nosedive. Kan tried to distance himself from Ozawa's scandal-tainted image.

"I would like to make sure Japan's politics won't be thrown into confusion by money and politics problems," Kan said, in a thinly veiled criticism of Ozawa.

(Writing by Linda Sieg; additional reporting by Kiyoshi Takenaka, Yoko Kubota and Chikafumi Hodo; Editing by Ron Popeski)