* Ozawa poses challenge but voters put off by scandal
* Party leadership vote on Sept 14 to decide PM
* Bid risks distracting party as yen surges, economy slows
* Policy vacuum could embolden market to push yen higher (Adds party policy chief, voter quotes)
By Chisa Fujioka and Yoko Nishikawa
TOKYO, Aug 26 (Reuters) - Japanese ruling party powerbroker Ichiro Ozawa said on Thursday he would challenge Prime Minister Naoto Kan for the leadership next month, a battle analysts say could create a policy vacuum and push a surging yen higher.
Kan, who took over in June as Japan’s fifth prime minister in three years, is fighting for his job after an election loss last month deprived the Democratic Party of Japan (DPJ) of a majority in the upper house.
The DPJ-led government, which took power for the first time a year ago, is struggling to put a cap on the surging yen JPY=, which hit a 15-year high against the dollar this week and threatens to derail an export-led recovery. [ID:nTKB007015]
Analysts warned that Ozawa’s candidacy would create a policy vacuum, clearing the way for market players to push the yen higher against the dollar and threatening to cause further declines in share prices. [ID:nTOE67O09M]
"The fact that Ozawa has said he'll run ... means that whatever Kan might say about policy, the markets won't listen," said Norihiro Fujito, general manager at Mitsubishi UFJ Morgan Stanley Securities. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ PM support remains sluggish: link.reuters.com/jad44n Japan's massive public debt: r.reuters.com/sez92m For more stories on Japanese politics: [ID:nPOLJP] For stories on the Japanese economy: [ID:nECONJP] Analysis on Japan political risk r.reuters.com/jyj83n For a package of Reuters reports on the yen click: r.reuters.com/keb47n ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
Ozawa has blasted Kan for floating, right before the July upper house election, the political sensitive idea of a future sales tax increase.
While Kan has since toned down those calls for debate on the tax — which he said was necessary to boost finances — Ozawa’s allies have called for a showdown in the party vote on Sept. 14.
The winner will likely be the prime minister by virtue of the party’s majority in the parliament’s powerful lower house.
Ozawa, 68, who heads the biggest group of lawmakers in the DPJ, poses a genuine threat to Kan but analysts say it is unclear who will back him given low voter support and the fact he faces the possibility of being indicted in a political funding scandal.
Analysts said the party was likely to fracture whether Ozawa wins or loses, and while the DPJ would likely stay in power in the short term it was hard to predict how matters would play out.
“The scenarios are endless. Anything can happen,” said Keio University professor Yasunori Sone.
“I think Ozawa has a 40 percent chance of winning,” said Tomoaki Iwai, a political science professor at Nihon University. “He appears to lack the numbers, but he has a lot of support among the local party organisations and members in the regions.”
In a thinly veiled criticism of the party’s internal power struggle, Suzuki Motor Corp (7269.T) Chief Executive Osamu Suzuki said the government should make protecting the economy a priority.
“I hope they will take steps to make sure Japan doesn’t sink, and then fight amongst themselves,” he told a news conference called to launch a remodelled car.
The DPJ’s policy chief, Koichiro Gemba, said at a meeting with economic ministers that the government should consider an extra budget if needed for the current fiscal year to March.
But efforts to craft economic steps to keep the recovery on track would be constrained by a public debt already twice the size of Japan’s nearly $5 trillion economy. [ID:nTOE67O09M]
All the talk by authorities has had little impact and experts question whether even intervention in the currency market would work unless the Bank of Japan acts boldly to ease monetary policy, a step central bankers appear reluctant to take.
“Possible political confusion could hamper the decision-making process and that will not help support the economy ... Even if Ozawa wins, I don’t think he would come up with effective economic steps,” said Junko Nishioka, chief economist, Japan, at RBS Securities.
Opinion polls show voters are put off by Ozawa’s scandal-tainted image and his history as a wheeler-dealer who pulls strings behind the scenes.
Known in the past as “Destroyer” for breaking up parties he led, Ozawa quit last year as DPJ leader over the funding scandal and stepped down as the party’s No.2 in June.
“I’m not sure about Ozawa’s leadership skills, but he has a dirty image when it comes to ‘politics and money’, so I don’t think it’d be suitable for such person to run the country,” said Yoshitaka Otsubo, 40, who works in the services sector. (Additional reporting by Linda Sieg, Elaine Lies, Chang-Ran Kim, Yoko Kubota and Antoni Slodkowski; Editing by Alex Richardson) (firstname.lastname@example.org; Reuters Messaging: email@example.com; +813 6441 1882) (If you have a query or comment on this story, send an email to firstname.lastname@example.org)