By Linda Sieg and Chisa Fujioka
TOKYO (Reuters) - Japan's new economics minister warned on Friday that the country faced a fiscal dead end, signalling that a revamped cabinet was serious about tax reforms to rein in the country's massive public debt.
But with opposition parties able to block bills in parliament's upper house and the ruling Democratic Party of Japan (DPJ) divided, scepticism over policy success runs deep.
Prime Minister Naoto Kan drafted Kaoru Yosano, an advocate of raising the 5 percent sales tax to fund bulging social welfare costs, in a cabinet reshuffle on Friday.
"Japan's fiscal policy will hit a dead end if it is left as it is," Yosano told reporters.
His appointment could ease some concerns in the bond market by suggesting future progress on fiscal and tax reform, said Akitsugu Bandou, a senior economist at Okasan Securities.
"But the government will continue to face a severe situation because of political deadlock, and the cabinet reshuffle is not necessarily going to change the situation that the DPJ lacks political power," Bandou said.
Kan appointed former administrative reform minister Yukio Edano as his new chief cabinet secretary, bowing to opposition demands to ditch his influential second-in-command in an effort to smooth the way to pass bills in a divided parliament.
Kan also moved Yosano's predecessor, Banri Kaieda, to the trade portfolio, which could encourage proponents of more open markets since he has come out in favour of joining a U.S.-led free trade initiative, the Trans-Pacific Partnership (TPP).
But he retained Finance Minister Yoshihiko Noda, Foreign Minister Seiji Maehara and Defence Minister Toshimi Kitazawa, among others. Shozaburo Jimi, from a tiny coalition party, remained banking minister.
THE BIGGER PICTURE
Replacing Yoshito Sengoku with Edano clears the path for debate on the state budget for the year from April, but it is unclear if Kan can find enough votes to pass enabling laws.
The government approved a record 92.4 trillion yen (707.56 billion pounds) draft budget in December, adhering to a self-imposed cap on new debt issuance.
But for a third year in a row, borrowing will exceed tax revenues as a source of funding. Japan's public debt is already about twice the size of its $5 trillion (3.15 trillion pounds) economy.
Kan has sought multiparty talks on tax and social welfare reform with an eye to outlining changes by June, but opposition parties say they want to see DPJ proposals first.
Some analysts worry that Edano, 46, may not be up to the demands of his new job.
"He can be an easy target (for opposition parties) because of a tendency to straight-talk but also to committing gaffes and offending people unnecessarily," said Sophia University professor Koichi Nakano.
Opposition parties had threatened to boycott debate on the budget for the 2011/12 fiscal year, which starts on April 1, unless Sengoku and Transport Minister Sumio Mabuchi were sacked.
The government can enact the budget because the DPJ controls the powerful lower house, but the opposition can block bills in the upper chamber needed to implement the spending.
Edano has also been a critic of DPJ powerbroker Ichiro Ozawa and his appointment could deepen a rift in the party over the veteran strategist, who faces indictment in a funding scandal.
Many Ozawa backers oppose a sales tax rise as well as the free trade deals Kan wants to pursue.
Yosano held several key posts in Liberal Democratic Party (LDP) governments before the conservative party was ousted by the Democrats in 2009. He bolted the LDP last year to set up the tiny Sunrise Party, which he is now leaving to join the cabinet.
Japan's public debt, at twice GDP, is the worst among advanced countries, although few expect a Greek-style crisis any time soon because 95 percent is held by domestic investors.
Private economists agree that raising the sales tax is essential but many lawmakers fear angering voters, especially ahead of local elections in April.
A ruling party mauling at the polls would fuel calls for Kan, already Japan's fifth premier since 2006, to resign.
Kan took over last June and led his party to defeat in an upper house poll a month later after clumsily floating a possible rise in the sales tax.
(Additional reporting by Shinji Kitamura, Kaori Kaneko, Shinichi Saoshiro, Rie Ishiguro, Kiyoshi Takenaka and Yoko Kubota; Editing by Tomasz Janowski and Edmund Klamann)
