* Abe promises aggressive monetary, fiscal policies
* Yen hits 20-month low on “Abenomics” expecations
* Abe appoints lots of right-leaning allies to cabinet
By Linda Sieg and Kiyoshi Takenaka
TOKYO, Dec 26 (Reuters) - New Japanese Prime Minister Shinzo Abe unveiled a cabinet stacked with close allies on Wednesday, kicking off a second administration committed to battling deflation and coping with the challenge of a rising China.
Abe, 58, has promised aggressive monetary easing by the Bank of Japan and big fiscal spending by the debt-laden government to slay deflation and weaken the yen to make Japanese exports more competitive.
The grandson of a former prime minister, Abe has staged a stunning comeback five years after abruptly resigning as premier in the wake of a one-year term troubled partly by scandals in his cabinet and public outrage over lost pension records.
“I want to learn from the experience of my previous administration, including the setbacks, and aim for a stable government,” Abe told reporters before parliament’s lower house voted him in as Japan’s seventh prime minister in six years.
The vote was a formality after Abe’s Liberal Democratic Party (LDP) surged back to power in this month’s election, three years after a crushing defeat at the hands of the novice Democratic Party of Japan. Abe was to be confirmed by Emperor Akihito later in the day, another formality.
Abe appointed a cabinet of close allies leavened by some LDP rivals to fend off the criticism of cronyism that dogged his first administration.
Former prime minister Taro Aso, 72, was named finance minister and also received the financial services portfolio.
Ex-trade and industry minister Akira Amari becomes minister for economic revival while policy veteran Toshimitsu Motegi takes over as trade minister. Motegi is also be tasked with formulating energy policy in the aftermath of the Fukushima nuclear disaster last year.
Loyal Abe backer Yoshihide Suga was appointed chief cabinet secretary, a key post combining the job of top government spokesman with responsibility for coordinating among ministries.
Others who share Abe’s agenda to revise the pacifist constitution and rewrite Japan’s wartime history with a less apologetic tone were also given posts, including conservative lawmaker Hakubun Shimomura as education minister.
“These are really LDP right-wingers and close friends of Abe,” said Sophia University professor Koichi Nakano. “It really doesn’t look very fresh at all.”
Fiscal hawk Sadakazu Tanigaki, whom Abe replaced as LDP leader in September, becomes justice minister while two rivals who ran unsuccessfully in that party race - Yoshimasa Hayashi and Nobuteru Ishihara - got the agriculture and environment/nuclear crisis portfolios respectively.
The yen has weakened about 9.8 percent against the dollar since Abe was elected LDP leader in September. On Wednesday, it hit a 20-month low of 85.38 yen against the greenback on expectations of aggressive monetary policy easing.
Abe has threatened to revise a law guaranteeing the Bank of Japan’s (BOJ) independence if it refuses to set a 2 percent inflation target.
BOJ minutes released on Wednesday showed the central bank was already pondering policy options in November, concerned about looming risks to the economy. The BOJ stood pat at its November rate review meeting but eased this month in response to intensifying pressure from Abe.
Abe also promised during the election campaign to take a tough stance in territorial rows with China and South Korea over separate chains of tiny islands, while placing priority on strengthening Japan’s alliance with the United States.
Abe appointed two low-profile officials to the foreign and defence portfolios.
Itsunori Onodera, 52, who was senior vice foreign minister in Abe’s first cabinet, becomes defence minister while Fumio Kishida, 55, a former state minister for issues related to Okinawa island - host to the bulk of U.S. forces in Japan - was appointed to the top diplomatic post.
Abe, who hails from a wealthy political family, made his first overseas visit to China to repair chilly ties when he took office in 2006, but has said his first trip this time will be to the United States.
He may, however, put contentious issues that could upset key trade partner China and fellow-U.S. ally South Korea on the backburner to concentrate on boosting the economy, now in its fourth recession since 2000, ahead of an election for parliament’s upper house in July.
The LDP and its small ally, the New Komeito party, won a two-thirds majority in the 480-seat lower house in the Dec. 16 election. That allows the lower house to enact bills rejected by the upper house, where the LDP-led block lacks a majority.
But the process is cumbersome, so the LDP is keen to win a majority in the upper house to end the parliamentary deadlock that has plagued successive governments since 2007.
“The LDP is still under the critical eyes of the public. We need to earn their trust by getting things done one by one,” Abe told party lawmakers ahead of the lower house vote.
“First on the agenda is economic recovery, beating deflation and correcting a firm yen and getting the economy back on the growth path. If we don’t pursue this target, an upper house election next year will be a tough one for us.”
In a sign of the “twisted parliament” Abe confronts, he was voted in with a whopping 328 votes in the powerful 480-seat lower house, but failed to win a first round vote in the upper chamber. He defeated new opposition Democratic Party chief Banri Kaieda in a run-off.