By Linda Sieg
TOKYO (Reuters) - Prime Minister Naoto Kan faces a tough challenge from powerbroker Ichiro Ozawa in a party vote on Tuesday that could reset fiscal priorities as Japan struggles with a strong yen, a weak economy and bulging public debt.
Japanese media surveys have shown the race between Kan, 63, who took office three months ago as the country's fifth premier in three years, and the 68-year-old Ozawa, a veteran strategist known for shaking things up, is too close to call.
The rivals in the election, the winner of which will likely be prime minister because of the Democratic Party of Japan's (DPJ) majority in parliament's powerful lower house, have clashed over prescriptions for curing Japan's deep-seated economic ills.
Kan has vowed to cap spending and debt issuance to rein in a public debt already twice the size of Japan's $5 trillion (3.2 trillion pound) economy. He also wants to debate raising the 5 percent sales tax to fund growing social welfare costs of a fast-ageing population.
Ozawa has promised to cut waste to fund party campaign promises to give consumers more cash, pry control over policy away from bureaucrats to reprioritise the budget, and consider more borrowing to fund stimulus if the economy stumbles.
He has pledged steps to curb the yen's rise to near 15-year highs, including solo intervention, and could well pressure the Bank of Japan to buy government bonds to fund his spending plans.
Kan's team has repeatedly expressed concern about the yen's climb but so far has refrained from stepping into the market.
DIVIDED PARTY, DIVIDED PARLIAMENT
The candidates will make their final appeals in speeches to party parliamentarians around 2 p.m. (6 a.m. British time), followed immediately by voting with results expected by 3:30 to 4 p.m.
Media have said Kan has an edge among local lawmakers and party members, who have already voted, but was neck and neck with Ozawa among members of parliament, whose votes have more weight.
Ozawa's admirers say the gruff, pugnacious politician has the leadership and skills to break through Japan's stalemate and win cooperation from opposition parties who control parliament's upper house and whose help is therefore needed to enact laws.
But it is unclear if Ozawa, whose future is clouded by a funding scandal, could survive a possible opposition campaign to stall parliamentary business.
A judicial panel of ordinary citizens is expected to decide next month whether he must be charged in the affair.
Whoever wins will need to unify the party, a process that could cause the victor to water down his policies. Failure could lead to a split and a possible realignment of party allegiances.
An Ozawa victory would likely boost share prices and government bond yields while weakening the yen, a Reuters poll showed last week. But many market players worry his policies would ultimately leave Japan worse off, the survey showed.
"He sounds as if he is saying things clearly, but there are many contradictions in his policies," said Katsuhiko Nakamura, executive director at think tank Asian Forum Japan.
Kan has also disappointed many with his lack of a convincing message for how to engineer growth, despite hopes that the former grass-roots activist was a pragmatist who could get things done.
The DPJ swept to power a year ago vowing change from more than 50 years of nearly non-stop rule by the conservative Liberal Democratic Party. But it floundered under Kan's predecessor Yukio Hatoyama and the DPJ-led ruling bloc lost its upper house majority in a July election after Kan floated the sales tax rise.
(Editing by Edmund Klamann)
