Japan PM has edge in party race but outcome unclear

TOKYO (Reuters) - Japanese Prime Minister Naoto Kan has a slight edge over powerbroker Ichiro Ozawa ahead of a party leadership vote next week, NHK public TV said Friday, but with many party lawmakers undecided the outcome is too close to call.

Whoever wins the September 14 vote faces the mammoth task of trying to keep a deeply split Democratic Party of Japan (DPJ) from unravelling while struggling with a strong yen, a fragile economic recovery, huge public debt and a divided parliament that threatens more policy deadlock.

Markets are bracing for a shift towards a more stimulative fiscal policy if Ozawa wins the September 14 vote. But whether the 68-year-old political strategist, his future clouded by a funding scandal, could survive an opposition attack is unclear.

"Ozawa is talking about steps to tackle yen strength and raising bond issuance. That would provide a short-term boost to the economy, but whether he could actually do these things if he became prime minister is a different matter," said Takeshi Minami, chief economist at Norinchukin Research Institute.

NHK said Kan, who took office just three months ago as Japan's fifth premier in three years, was neck and neck with Ozawa among the DPJ's 411 members of parliament with about 50 still undecided. The prime minister was leading among local lawmakers and party rank-and-file, whose votes carry less weight.

The winner is expected to become prime minister by virtue of the DPJ's majority in parliament's powerful lower house, the legacy of a huge election victory that swept the party to power for the first time last year.

Kan has vowed to cap new bond issuance for the fiscal year from next April at this year's level of around 44 trillion yen (340.6 billion pounds) to rein in public debt, already about twice the size of the $5 trillion economy.

ECONOMIC DATA COLD COMFORT

Ozawa, once a protege of Kakuei Tanaka -- a former premier and the architect of Japan's political regime of pork-barrel and party factions -- has said he would consider issuing new debt to fund stimulus steps if the economy worsens.

Data released Friday showed that Japan's economy grew a revised 0.4 percent in April-June from the previous quarter, more than an initial government estimate.

But the news was cold comfort for a government grappling with deflation and a strong yen, which hit a fresh 15-year high versus the dollar this week despite the Bank of Japan's monetary easing and threats of currency intervention by policymakers.

Kan's government, eager to look proactive on the economy, unveiled a package of measures Friday, but analysts doubted it would have much impact.

The Democrats swept to power for the first time last year, promising to change the way the country is governed after more than 50 years of dominance by the conservative Liberal Democratic Party. But the Democrats have since floundered, suffering a thrashing in a July upper house election.

Even if Kan wins the party vote, a robust showing by Ozawa would cloud the outlook for efforts to rein in debt while engineering growth despite Japan's ageing, shrinking population.

"How to handle the Ozawa camp would be the first challenge for Kan after the election," said Sophia University professor Koichi Nakano, suggesting that some Ozawa backers could get cabinet posts in an attempt to keep the party together.

An Ozawa victory would also leave big unanswered questions.

Admirers say his political skills would help win opposition backing to get bills through parliament, but his scandal-tainted image could make rival parties wary of joining hands.

A judicial panel of ordinary citizens is expected to decide in October whether Ozawa must face indictment over a funding scandal in which three of his aides have already been charged.

"The opposition would harshly attack Ozawa over 'money and politics'," Koichi Kato, a former LDP executive, told Reuters.

"Parliament would grind to a halt."

Nor, Kato said, would many LDP lawmakers respond to overtures from Ozawa to create a new party if he bolted the DPJ in the wake of a defeat. "Ozawa doesn't have many fans in the LDP," he said.

(Additional reporting by Yoko Nishikawa, editing by Jonathan Thatcher)

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