Analysis: Japan PM Kan survives challenge but woes not over

TOKYO (Reuters) - Japanese Prime Minister Naoto Kan, who defeated powerbroker Ichiro Ozawa in a party leadership vote on Tuesday, must now try to unify the party while coping with a strong yen, weak economy, big public debt and divided parliament.

Here are some implications of the Democratic Party of Japan (DPJ) leadership election.

* Kan's first task will be to try to unify the DPJ while keeping Ozawa from wielding too much clout, so that he can push ahead with efforts to curb a public debt already about twice the size of the $5 trillion economy. He has vowed to cap new bond issuance for the fiscal year from next April at this year's level of around 44 trillion yen ($523 billion) and said he would revise campaign spending pledges if funds fall short.

* Roughly half of all respondents to a Reuters poll last week said a Kan victory would be neutral for stocks, bonds and the yen, but of those predicting an impact, most said it would be bad for shares, push bond yields down and pave the way for yen gains.

* Kan will try to stick to his hawkish fiscal stance but has said he would consider an extra budget for the current fiscal year if the economy deteriorates. He will also struggle to trim budget requests of a record 96.7 trillion yen that must be cut by December to keep the debt issuance cap while funding the rising social security costs of a fast-aging population.

* Kan had overwhelming support from the party rank-and-file but Ozawa's robust showing among members of parliament could make it tough for Kan to ignore the powerbroker's influence in personnel decisions as well as policies. Kan will likely reshuffle his cabinet, most of whose ministers were appointed by his predecessor, and may well give posts to some of Ozawa's backers to try to unify the party, potentially complicating policy decisions.

* Kan's government will likely keep trying to talk down the yen, including with intervention threats, as it holds tenaciously near 15-year highs and imperils Japan's export-driven recovery. He will also keep pushing the Bank of Japan to help fight deflation, but the pressure will be less than under an Ozawa administration.

* The 68-year-old Ozawa, long known for shaking up politics, is not expected to bolt the ruling party soon and if he did, many of his supporters would probably be reluctant to follow suit. Nor are opposition parties likely to want to join hands soon if Ozawa does leave. Some analysts say Ozawa could bide his time and if Kan's administration cannot enact a 2011/12 budget, the veteran strategist might then defect, sparking political confusion.

* Kan is likely to reach out to opposition parties including the biggest rival group, the conservative Liberal Democratic Party (LDP), as well as the Buddhist-backed New Komeito and the small reformist Your Party, for help in getting bills through parliament, where the ruling bloc lacks an upper house majority.

* He may be able to do deals with the LDP on the budget and fiscal reform, including a future rise in the 5 percent sales tax, if he drops campaign promises to put more cash in consumers' pockets -- a move some of his supporters have said is feasible. If not, he could face a crisis in March and be forced to call a snap election, although no lower house poll is mandated until 2013.

* Kan will try to implement a U.S.-Japan deal to shift a Marines airbase to a less crowded part of Okinawa island, but faces opposition to the deal from local residents. The problem could cloud a November visit to Japan by U.S. President Barack Obama and fray ties with Washington, Tokyo's close security ally.

($1=84.16 Yen)

(Editing by Edmund Klamann)