FACTBOX-Five political risks to watch in Japan

By Linda Sieg

TOKYO, Nov 2 (Reuters) - Japan's new government faces a dilemma over how to keep its campaign promises while reining in huge debt, a fragile economy that could slip back into recession, and strains in ties with close security ally the United States.

Investors watching Japan must also factor in policy gaps among Prime Minister Yukio Hatoyama's Democratic Party and two tiny but vocal coalition partners.

Following is a summary of key Japan political risks to watch:

* FISCAL DILEMMA

The new government is trying to put politicians instead of bureaucrats in charge of drafting budgets in order to reduce waste and reallocate funds from companies to consumers.

But cabinet ministers have presented budget requests totalling a record 95 trillion yen for the next fiscal year, starting April 1, 2010, up from about 92 trillion proposed by the defeated Liberal Democratic Party-led government.

Who will take the lead in forcing cuts is unclear.

Finance Minister Hirohisa Fujii has said he wants to limit new bond issuance in 2010/11 to below the 44 trillion yen earmarked for this year.

But the goal looks in doubt given the size of the budget requests and falling tax revenues in an economy just emerging from a deep recession. One of Fujii's deputies has also said new JGB issuance may have to rise to 50 trillion yen anyway this year to cover the tax shortfall. [ID:nT350194]

That uncertainty over issuance is weighing on government debt, helping push the yield on benchmark 10-year bonds JP10YTN=JBTC to a 2-½ month high of 1.425 percent on Friday.

For a graphic showing the fiscal pressure on Japan, click: r.reuters.com/bad88d

Longer term, Japan faces burgeoning welfare costs of the world's fastest-ageing population. Hatoyama has promised to keep Japan's broad sales tax at 5 percent for the next four years. [ID:nT286286]

The government says spending more on consumers will boost domestic demand but critics say it lacks a broad growth strategy.

Key issues to watch:

-- The budget for 2010/11 is due by the end of this year and the focus is on whether the government can implement key campaign promises without issuing heaps of new debt, or postpone keeping pledges without upsetting voters.