TOKYO New Japanese leader Naoto Kan vowed to tackle Japan's huge public debt and keep ties with ally Washington on track as he launched a cabinet that also aims to sideline a scandal-tainted party power broker before an election.
The choice of Kan, 63, as Japan's fifth premier in three years, has bolstered his Democratic Party's chances in an upper house election it needs to win to break free of a tiny partner and avoid having to find more allies to pass bills easily.
The Democrats will stay in power regardless of the outcome of the upper house poll, expected in July, but a revamped coalition could complicate policymaking, depending on its composition.
Coming off a six-month stint as finance minister, Kan appears committed to reining in a public debt that is already twice the size of the economy. His cabinet also seems united on the topic, except for banking minister Shizuka Kamei, who heads a tiny coalition party and likes big spending.
"Restoring our fiscal health is indispensable for economic growth," Kan told a news conference, adding that just raising taxes would spur deflation and that it was necessary to prioritize spending on growth areas. He also urged a non-partisan debate on fiscal and tax reform.
Kan, who takes over after indecisive predecessor Yukio Hatoyama squandered sky-high support during just eight months in office, gave the finance portfolio to fellow fiscal conservative Yoshihiko Noda.
He also appointed like-minded former national strategy minister Yoshito Sengoku as chief cabinet secretary -- the top government spokesman and an important policy coordinator.
"Kan has called for the need for fiscal reform, so that's the direction the new government will head in. But the question is how much they can actually deliver," said Takeshi Minami, chief economist at Norinchukin Research Institute.
The next general election must be held by late 2013, and while the Democrats have pledged not to raise the 5 percent sales tax before then, party fiscal reformers want to state clearly their intention to do so before that vote takes place.
WEAK YEN, OZAWA FACTOR
Kan's commitment to fiscal reform, though, could well be tested by an economic slowdown.
"As long as the economy sustains its recovery, Kan will start working on fixing Japan's finances," Minami said. "If problems in Europe begin to hurt and undermine the recovery, there's a risk Japan will turn back to big spending again.
Kamei could also prove a headache, since the Democrats need his tiny party's support to pass bills in the upper house.
"Unless the economy grows, it is impossible to secure revenue merely by (reforming) the tax system," he told a news conference.
In a sign the recovery remains fragile, bank lending marked its biggest annual fall in nearly five years in May, as companies remained reluctant to boost capital spending.
Relatively low government bond yields suggest the market is not expecting an immediate crisis, but credit ratings agencies have threatened downgrades if the government fails to craft credible plans to rein in debt and spur growth.
Kan also said he was aware of the view that a weak yen was good for Japan's export-driven economy, but perhaps having learned caution as finance minister, steered clear of more specific comments.
Kan reappointed 11 ministers from Hatoyama's cabinet, including Foreign Minister Katsuya Okada, who must help manage ties with ally Washington, since an agreement to keep a U.S. airbase on Okinawa island -- forged amid controversy in Hatoyama's final days -- faces stiff opposition from residents.
Kan told the news conference that U.S-Japan ties would remain the core of Japan's diplomacy and that he would honor the bilateral deal while trying hard to reduce the burden on Okinawa, reluctant host to about half the U.S. forces in the country.
Many in the cabinet roster are also critics of party power broker Ichiro Ozawa, whose campaign skills were widely seen as helping the Democrats win last year's election but whose image as an old-style wheeler dealer has become a liability.
Ozawa has come under fire in a political funding scandal and could face charges in the case.
Kan, a former grass-roots activist with a reputation for challenging the status quo, must convince voters that Ozawa has been sidelined without triggering internal party warfare with the veteran politician and his numerous backers.
Ozawa was conspicuous by his absence.
But few pundits expect him to fade entirely away, and the veteran politician has already hinted that he may seek to oust Kan if the Democrats fare badly in the upper house election.
The degree of Ozawa's clout matters both to voters worried that he is trying to revive the vested-interest politics perfected by the LDP during its half-century rule, and to financial markets nervous about Japan's debt.
Ozawa has opposed making a clear statement in the party's election platform on the need to raise the sales tax.
(Additional reporting by Stanley White, Tetsushi Kajimoto, Chisa Fujioka, Rie Ishiguro, Yoko Kubota and Kiyoshi Takenaka; Editing by Chris Gallagher)