By Yuzo Saeki
TOKYO (Reuters) - Japanese Finance Minister Shoichi Nakagawa resigned on Tuesday after being forced to deny he was drunk at a G7 news conference, dealing a fresh blow to unpopular Prime Minister Taro Aso in an election year.
Aso said Economics Minister Kaoru Yosano would succeed Nakagawa, an appointment that would spell little change for policymaking. Yosano, a linchpin of Aso's embattled administration, is a fiscal hawk who has become more flexible about spending as the country's recession has deepened.
The fuss over Nakagawa's behaviour and now his resignation comes as Aso's own public support is crashing -- below 10 percent in one recent survey -- ahead of an election the conservative Liberal Democratic Party (LDP) is in danger of losing after more than half a century of almost unbroken rule.
Only a day earlier Aso told his close ally to stay in his post despite an uproar over the minister's behaviour at the G7 news conference in Rome.
"I think it is a further sign that the Aso administration is in its final phase," said Jonathan Allum, Japan strategist at KBC Financial Products.
"Either Mr. A will be pushed aside by his own party or he will limp on to defeat in the general election."
Nakagawa had earlier offered to step down after parliament passed budget bills, a process that could have taken weeks. That failed to satisfy the government's junior coalition partner and an emboldened opposition, which both demanded he go immediately.
Yosano, 70, would also replace Nakagawa as head of the financial services agency, Aso said.
At the Group of Seven news conference, Nakagawa slurred his words and appeared to fall asleep at one point.
He has said he had not done more than sip some wine before the news conference and cold medicine had affected his behaviour.
"I have caused trouble to the people," Nakagawa told an earlier news conference. "I apologise for causing commotion from my careless health management."
Aso -- Japan's third prime minister in less than two years -- is trying to pass an extra budget for the fiscal year ending on March 31 as well as a record 88.5 trillion yen (679 billion pounds) budget for the year to March 2010 to help stimulate the economy, now sinking deeper into recession.
Media polls show the Democrats have a good shot at ousting Aso's LDP in an election that must be held by October.
About the only bit of good news for Aso was an invitation to meet U.S. President Barack Obama in Washington on February 24.
Visiting U.S. Secretary of State Hillary Clinton said it would make Aso the first foreign leader to meet Obama at the White House. Aso had accepted, Japanese officials said.
(Additional reporting by Chisa Fujioka and Tetsushi Kajimoto; Writing by Linda Sieg, Editing by Dean Yates)
