WRAPUP 4-Ruling DPJ faces election setback in Japan

* DPJ faces worst-case scenario of 50 seats or fewer –
media

* Poll result could stall Kan’s push to fix public finances

* JGB yields could rise on faltering fiscal reform hopes
(Adds PM Kan, paragraphs 10-11)

By Yoko Kubota and Linda Sieg

TOKYO, July 9 (BestGrowthStock) – Japanese Prime Minister Naoto
Kan’s Democratic Party looks increasingly likely to suffer a
sharp setback in a weekend election, surveys showed on Friday,
putting his job at risk and hampering efforts to curb a huge
public debt.

Flagging support for the Democrats, who swept to power last
year promising change, had jumped after Kan — Japan’s fifth
leader in three years — replaced his indecisive predecessor
last month.

But ratings slipped after Kan floated the typically taboo
topic of raising the sales tax and seemingly failed to persuade
voters he had a clear plan for fixing Japan’s economic woes.

“Kan has failed to get voters’ minds off what a mess the
DPJ has made of being in power,” said Columbia University
professor Gerry Curtis. “They won’t be able to get anything
done. It will be political manoeuvring for months to come.”

The DPJ, which ousted its long-dominant rival last year
with promises to cut waste and focus spending on consumers,
will almost certainly run the government however many seats it
wins on Sunday, because it controls the powerful lower house.

The party needs a majority in the upper chamber to avoid
policy deadlock and begin taking steps to reduce a public debt
already about twice the size of the nearly $5 trillion economy,
the worst among advanced countries.

Surveys by the Nikkei, Yomiuri and Asahi newspapers showed
the DPJ would likely win around 50 or even fewer of the 121
seats up for grabs in the 242-member chamber — well short of
Kan’s target, and a drop from its current 54 seats.

That would deprive the DPJ and its tiny coalition partner,
the pro-spending People’s New Party, of a majority in the upper
house. The Democrats would be forced to seek new allies,
hampering the government’s ability to forge ahead with the
fiscal reform that Kan has put at the heart of his campaign.

The DPJ’s current coalition partner opposes raising the 5
percent sales tax any time soon, as do some potential allies.
Other opposition parties agree a rise is inevitable but would
probably be reluctant to help out the rival DPJ, which has not
yet mapped out any detailed tax reform proposals.
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See graphics:

PM support falls over sales tax:
http://r.reuters.com/myv63g

DPJ lead narrows over rival:
http://link.reuters.com/jev83j

Japan’s massive public debt:
http://r.reuters.com/sez92m

Upper house seats before poll:
http://link.reuters.com/tuv85m

More stories on the Japanese politics:
[ID:nPOLJP]
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PM VULNERABLE TO CHALLENGE

Kan, who has said that any sales tax hike would take at
least two to three years to implement, told reporters there may
be misunderstanding among voters that the tax would rise right
away.

“I made a proposal to start non-partisan debate on not just
the sales tax but on other taxes too so we can avoid default,
but voters may have read too much into it,” he was quoted by
Kyodo news agency as saying while campaigning in northern
Japan.

A showing of fewer than 50 seats would leave Kan vulnerable
to a challenge from powerbroker Ichiro Ozawa — a critic of his
sales tax proposal — ahead of a September party leadership
vote.

“If they go below 50, the mass media and Ozawa will make a
fuss,” said independent analyst Hirotaka Futatsuki.

But few expect Kan, a 63-year-old former grassroots
activist, to quit without a fight, and Kyodo news agency quoted
Democratic Party Secretary-General Yukio Edano as saying the
premier would stay on regardless of the poll outcome.

The Japanese government bond market had rallied last week
in part on fiscal reform hopes. The rally has since fizzled on
expectations the DPJ could fall well short of its election
goal, although many expect that debate on a possible sales tax
rise will persist now that Kan has raised the long taboo topic.

If the ruling party fails to reach its target, yields would
likely rise, said Shinji Nomura, chief fixed-income strategist
at Nikko Cordial Securities. [JP/]

The Asahi newspaper said the DPJ could win fewer than 50
seats, but gave a range of 42 to 57, reflecting close races in
many districts and a hefty chunk of voters still undecided.

“I had a lot of hopes for Kan, but the way he brought up
the sales tax idea was really bad,” said Toshimitsu Kinjo, 54,
who works at small publishing firm and has yet to make up his
mind.

“As they keep saying in the media, there are other things
that should be done first,” added Kinjo, who said he had voted
for the DPJ last year but was now undecided. “Kan is a more
practical politician than Hatoyama and I thought he could run
the government well, but then he came up with the sales tax
talk.”

Political parties have also struggled to grab voter
interest in Japan’s second national election in less than a
year, with a betting scandal hitting the national sport of
sumo, the World Cup soccer tournament and even heavy rain
competing for attention.

Media surveys showed that both the small pro-reform Your
Party and New Komeito, which partnered with the Liberal
Democratic Party until its ouster last year, could win around
10 seats, making them attractive potential allies.

The leaders of both parties have ruled out an alliance with
the DPJ, but analysts say they might change their tune later.

The upper house can block bills other than treaties and
budgets and the current coalition lacks the two-thirds lower
house majority that would let it override the upper chamber.

In the latest sign that the Democrats were struggling, the
Nikkei survey showed their lead over the opposition LDP had
shrunk, with 32 percent of respondents planning to vote for the
DPJ — down three points — against 22 percent for the LDP and
11 percent for the Your Party.

Voter support for Kan’s government also fell 5 points to 45
percent in the Nikkei poll, a 23-point drop from his initial
rating after taking office last month.
(Additional reporting by Shinichi Saoshiro; Editing by Nick
Macfie)

WRAPUP 4-Ruling DPJ faces election setback in Japan