Japan's PM hangs on but outlook grim

TOKYO Mon Mar 7, 2011 4:48am EST

Japan's Prime Minister Naoto Kan attends a budget committee meeting in the upper house of parliament in Tokyo March 7, 2011. REUTERS/Toru Hanai

Japan's Prime Minister Naoto Kan attends a budget committee meeting in the upper house of parliament in Tokyo March 7, 2011.

Credit: Reuters/Toru Hanai

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TOKYO (Reuters) - Japan's unpopular Prime Minister Naoto Kan refused on Monday to step down after the resignation of his foreign minister over a political funding scandal that has added to pressure on him to quit or call a snap election.

But it is far from clear how Kan, if he does manage to cling to office, will be able to resolve the political stalemate that has left the government struggling to implement policies to cut into a huge public debt and win approval from a divided parliament to enact a new budget from April.

"Carrying out the administration's duty for the four-year term and then letting the people decide at the ballot box is best for the people themselves," he told a parliamentary session.

"I intend to firmly fulfill my duty until that time comes."

But some analysts warned that Kan's government may well collapse sooner rather than later. He is Japan's fifth leader since 2006 and has no clear successor in sight.

The resignation of Seiji Maehara, a security hawk and critic of China's military buildup, removes a strong contender to replace Kan and has deepened the impression of a government in disarray, unable to resolve fundamental problems facing the world's third largest economy.

The stalemate is blocking passage of bills to implement a $1 trillion budget for the year from April and keeping the government from tackling tax reforms to curb massive public debt, already twice the size of the $5 trillion economy.

Kan has made fiscal reforms including a rise in the 5 percent sales tax a priority as a way to fund the social costs of a fast aging society. But he has failed to get opposition parties to join in talks on the topic.

Japan's Rating and Investment Information (R&I) agency told Reuters on Monday it may cut the country's sovereign rating before local elections in April as deepening political turmoil could delay efforts to fix the country's tattered public finances.

Standard & Poor's cut Japan's rating by one notch in January and Moody's warned last month that lack of success on fiscal reform would have a negative impact on its rating.

"LACK OF GOVERNING ABILITY"

Chief Cabinet Secretary Yukio Edano will serve temporarily as foreign minister while Kan picks a successor, who will have their hands full managing strained ties with China and Russia and keeping relations with ally Washington on an even keel.

Kan's health minister, Ritsuo Hosokawa, is also under fire for messy handling of measures to help housewives who had mistakenly failed to pay their pension premiums.

Media warned more cabinet ministers could quit in a "domino effect," although Kan told parliament that he wanted to keep the health minister in his post.

Kan faces pressure from within his own fractious Democratic Party of Japan (DPJ) to step down, while opposition parties are pushing him to call a snap election in the lower house.

"This has revealed the Kan administration's lack of governing ability, and the only ways to break through this situation are for the cabinet to resign as soon as possible or for a snap election to be called," Kenji Kosaka, a lawmaker in the main opposition Liberal Democratic Party (LDP), told reporters.

Jiji news agency quoted an LDP executive as saying the party could submit a censure motion against the prime minister this month.

A Yomiuri newspaper poll released on Monday showed that 51 percent of voters wanted Kan to resign, with 56 percent saying they'd blame the government and DPJ if bills needed to enact the budget for the year from April are not passed on time.

The 2011/12 budget itself can be enacted by parliament's lower house alone. But related bills to implement it require approval of the upper chamber, where the opposition have threatened to use their majority to block legislation.

Some analysts said Kan may hang on to office in the hope that public opinion will eventually force opposition parties to compromise.

"In order to quit, he would need to accomplish something by doing so. But there is no prospect that the budget bills would pass if he resigned," said Keio University professor Yasunori Sone. "So even if his administration is falling apart, he must hang on ... He cannot even call an election."

Others said Kan might step down in return for opposition help passing the budget and a promise to call an early election.

The DPJ could fall from power if an election were held soon but the problem of the divided parliament would likely remain since no single party would have a majority in both chambers no matter who wins.

Maehara admitted accepting 250,000 yen ($3,000) in political donations between 2005 and 2010 from a Korean resident in Japan. Taking political donations from foreign nationals is illegal if done intentionally.

(Additional reporting by Linda Sieg, Antoni Slodkowski and Shinichi Saoshiro and Tetsushi Kajimoto; Editing by Andrew Marshall)

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