(For more stories on Japanese politics click [ID:nPOLJP])
* Slide in ratings threatened ruling party ahead of polls
* Finance minister Kan, fiscal conservative, likely
* Yen slips but market reaction mostly muted
* Election outlook could improve, but unclear how much
(Updates paragraph 14 to say cabinet to be formed on Friday)
By Linda Sieg and Chisa Fujioka
TOKYO, June 2 Japanese Prime Minister Yukio
Hatoyama and his powerful ruling party No. 2 quit on Wednesday
to try to boost the party's fortunes in an election next month,
less than a year after sweeping to power with promises of
The political turmoil could delay efforts to thrash out
plans set to be announced this month to cut the country's
public debt, which stands at about 200 percent of GDP, and a
strategy to engineer economic growth in an ageing society.
But if, as many expect, fiscally conservative Finance
Minister Naoto Kan takes the helm, that could raise the chances
of bolder steps to rein in debt, including a pledge to consider
raising the 5 percent sales tax.
Hatoyama's Democratic Party of Japan (DPJ) made history
with a landslide election win last year, promising to change
how Japan is governed after more than 50 years of cosy ties
among bureaucrats, companies and lawmakers under the Liberal
But after eight months of indecision and broken promises,
the 63-year-old Hatoyama -- nicknamed "The Alien" for his
quirky comments -- bowed to pressure from his party to quit
ahead of an election for the upper house of parliament expected
Graphic on Japan voter support: r.reuters.com/myv63g
Graphic on voting intentions:
For more stories on Japanese politics click [ID:nPOLJP]
Reuters Insider TV on PM quits:
Reuters Insider TV on foreigners' Japan holdings may fall:
An election loss would not oust the DPJ-led government
given its majority in the more powerful lower house, but the
ruling bloc needs a majority to keep legislation from being
With tears in his eyes, Hatoyama told party lawmakers he
and party secretary-general Ichiro Ozawa would resign.
Hatoyama said later that, without public support, the
government could not meet its goals.
"So I decided that my resignation would serve this
country's interests," Hatoyama, who becomes Japan's fourth
leader to quit in less than three years, told reporters.
Hatoyama's ratings had nosedived because of voter doubts
about his leadership. Ozawa's image as an old-style powerbroker
pulling strings behind the scenes also eroded public support.
FINANCE MINISTER KAN NEXT?
Kan, seen as the frontrunner to replace Hatoyama, told
reporters he would run in a vote among DPJ lawmakers on Friday.
"Unfortunately there wasn't enough time under prime
minister Hatoyama to meet the expectations the people had when
they voted for us last autumn, so I want to keep trying," he
No other candidates have yet raised their hands, although
Kan's victory would not be a done deal if the still-powerful
Ozawa backed someone else.
A new cabinet will then be formed on the same day, a DPJ
official said, quicker than many had thought.
The yen JPY= slipped after the resignations but financial
market reaction was mostly muted given the slim chance of
radical economic policy shifts, persistent uncertainty about
the election outcome and a deep sense of deja vu after another
The likely selection of Kan, who made his name battling
bureaucrats during a stint as health minister, would be
welcomed by investors and voters worried about Japan's public
debt, although lawmakers up for re-election will probably be
"Whether he gets his way at this juncture is hard to tell,"
said Koichi Nakano, a Sophia University professor.
The short-tempered Kan has in the past pressed the Bank of
Japan to do more to fight deflation and been positive about
raising the 5 percent sales tax in the future to fund bulging
social welfare costs.
"If finance minister Kan takes over, it would be welcome
news for the JGB market because Kan is more proactive about
fiscal discipline and about raising the consumption tax than
any other cabinet minister," said Hirokata Kusaba, economist at
Mizuho Research Institute.
Kan surprised markets earlier this year by saying he wanted
the yen to weaken more and that most businesses were in favour
of a dollar/yen rate around 95 yen. Since then he has mostly
toed the ministry line that stable currencies are desirable and
markets should set foreign exchange levels.
The Bank of Japan, which wants a credible government plan
to rein in the huge public debt, is worried a policy stalemate
will delay fiscal reform. But the political vacuum will give
the central bank breathing space and ease government pressure
for more action on deflation, at least until after the
Some analysts said the change of the party's top two
leaders would give the Democrats a boost before the election,
but most expect the party and its small ally, the New People's
Party, still to fall short of a majority in the lower house.
"A big reason for the falling support was the
Hatoyama-Ozawa duo," said Tsuneo Watanabe, a senior fellow at
the Tokyo Foundation think tank. "Now that they have gotten rid
of both, they can appeal to voters that they can govern
Optimists say a new post-election coalition might even be
more consistent on policies, such as the need to rein in debt.
But not all voters were impressed, and some are likely
either to cast their ballots for one of the new small parties
recently formed by Liberal Democratic Party rebels -- or stay
"This is making me lean towards neither the Liberal
Democratic Party nor the Democratic Party. I might end up
having no party to vote for," said Yoshimasa Muroi, a
A change in leadership is unlikely to alter Japan's
ambitious goal to cut greenhouse gas emissions by 25 percent
from 1990 levels by 2020, but could delay a law needed to
Hatoyama took office in September with ratings of more than
70 percent from voters hoping the party would make good on
promises to cut waste, pry policy control away from
bureaucrats, and put more money in consumers' hands to boost
But doubts over his leadership skills helped erode the
government's approval ratings, with one poll showing support at
just 17 percent after he failed to keep a campaign pledge to
move a U.S. airbase off Okinawa island in southern Japan.
Japan's new leader will also face a tough task keeping ties
with Washington on track, since Hatoyama's deal with Washington
to shift the airbase to northern Okinawa is staunchly opposed
by local residents and will be hard to implement.
(Additional reporting by Tokyo bureau; Editing by Charlotte
Cooper and Paul Tait)