* New PM Kan warns Japan must get fiscal house in order
* Bank min's departure improves fiscal reform outlook
* Small party to stay in ruling bloc after minister quits
* Democrat majority in upper house a long shot
* Govt in final stages of crafting fiscal reform plan
By Yoko Kubota and Linda Sieg
TOKYO, June 11 New Japanese Prime Minister
Naoto Kan, seeking to lay the groundwork for a future sales tax
rise, warned on Friday that the country risked defaulting on
its borrowing if it failed to rein in its massive public debt.
Kan, who took over the nation's top job after his unpopular
predecessor quit abruptly last week, has made tackling a public
debt that is already twice the size of Japan's GDP a top
priority amid market concerns about sovereign debt risk.
"We cannot sustain public finance that overly relies on
issuing bonds," Kan told parliament in his first policy speech.
"As we can see in the euro zone confusion that started from
Greece, there is a risk of default if the growing public debt
is neglected and if trust is lost in the bond market."
Kan spoke hours after his banking minister Shizuka Kamei --
an advocate of big spending, said he would quit the cabinet,
improving the chances Kan can forge ahead with fiscal reform.
The departure of the outspoken Kamei, sparked by a spat
over a controversial bill to roll back postal privatisation,
removes one obstacle, but how aggressively Kan can implement
fiscal reforms will depend on the results of an upper house
election, likely on July 11.
Support for the Democrats, who must win the July vote, has
jumped since Kan took over, and Kamei's resignation could be
another plus, analysts said.
Graphic on voting intentions:
Graphic on Japan voter support:
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"It was a bit unusual for somebody from such a tiny
political party to have this much importance, and with him gone
the Kan administration is likely to strengthen its foundation
going into the election," said Nagayuki Yamagishi, a strategist
at Mitsubishi UFJ Morgan Stanley Securities
"This could perhaps even lead to Kamei's party leaving the
coalition -- and while this might seem like political
instability to some foreign investors, this will really allow
Kan's government a chance to stabilise."
PNP Secretary-General Shozaburo Jimi, an upper house
lawmaker, was expected to be given the portfolio, since Kamei's
small People's New Party (PNP) remains in the ruling coalition.
FISCAL REFORM PLAN, GROWTH STRATEGY
National Strategy Minister Satoshi Arai told reporters the
government was aiming to compile a medium- and long-term plan
for reining in debt by June 22 at the latest, and that he
wanted to base the programme on capping government bond
issuance at 44.3 trillion yen ($484.6 billion) in the year to
March 31, 2012. [TOE65909A]
Kan, Japan's fifth premier in three years, has called for a
bipartisan debate on raising Japan's 5 percent sales tax to
help fund bulging social welfare costs in an ageing society,
while Kamei has been cautious about such a move.
Fiscal reformers in the Democratic Party want an election
manifesto due out soon to include a reference to increasing the
tax after the next general election, due by late 2013.
Rating agencies have warned they could cut Japan's
sovereign debt rating unless Tokyo crafts a credible plan to
rein in debt.
But analysts say the Democrats, who swept to power
promising to put more cash in consumers' hands to boost
domestic demand, would need to abandon some election pledges to
Kan also needs to twin his fiscal plans with a formula for
engineering growth after decades of stagnation, experts say.
"Ideally, the plan should be grounded in a broader economic
policy framework including pro-growth structural reforms and
clarity on the monetary policy objective," Andrew Colquhoun,
director at ratings agency Fitch's sovereigns ratings team,
said in an email.
Kamei, known for attacks on free-market capitalism and
pressing the Bank of Japan to do more to fight deflation,
formed the PNP in 2005 with other rebels from the then-ruling
Liberal Democratic Party to protest plans to privatise Japan
He resigned after the Democrats rejected his call to extend
the current session of parliament, set to end on June 16, to
enact a bill that would roll back those privatisation plans.
Democrats want the upper house poll soon to capitalise on a
big leap in voter support after Kan took over, and extending
the session would have pushed back the upper house vote.
Analysts still question whether the Democrats can win an
outright majority in the 242-seat upper house.
But the party's chances have clearly improved since Kan
took over from indecisive Yukio Hatoyama, who quit with his
ratings in tatters just nine months after the Democrats swept
"My sense is that Kamei leaving will probably increase
public support for Kan, because it looks as though he isn't
going to be pushed around by Kamei," said Columbia University
professor Gerald Curtis.
"I wouldn't put any money on it, but I think there is a
chance of a majority," Curtis added.
"It all depends on how effective Kan is as prime minister."
($1 = 91.40 Yen)
(Additional reporting by Elaine Lies and Charlotte Cooper;
Editing by Sugita Katyal)