- Associated Press - Tuesday, September 14, 2010

TOKYO (AP) — Japanese Prime Minister Naoto Kan may have fended off a challenge Tuesday from a powerful politician in his own party, but now he faces the more daunting task of reviving an economy that has sputtered under five premiers over the past four years.

Mr. Kan, who took office just three months ago, vowed to use the victory over Ichiro Ozawa, a party veteran and savvy powerbroker, to push ahead with efforts to cap spending, create jobs and build unity within the often fractious ruling Democratic Party of Japan.

The former finance minister won the vote for party chief by a 721-491 margin, garnering strong support among the rank-and-file membership. The victory means he remains prime minister because of the party’s superior numbers in the lower house of parliament.

Experts said that although he has cleared a major hurdle, Mr. Kan must now prove himself capable of tackling several serious challenges — including diplomatic friction with China and the United States, an emboldened opposition and a fast-rising yen that is threatening to stall Japanese exports.

He could also be hobbled in the months ahead by deep divisions within the party’s leadership: Mr. Kan snagged only a narrow majority over Mr. Ozawa among the party’s national lawmakers, whose support will be critical for pushing legislation through parliament.

Japan faces a really difficult situation,” Mr. Kan said after the vote. “Bringing Japan back to health is our first job, and I have resolved anew to do so with all of my strength, and with your support.”

Mr. Kan stressed that the ruling party must now put its internal battles aside and “use all of our strength together.”

Financial markets were not convinced he would succeed.

The yen on Tuesday hit a new 15-year high against the dollar, partially on concerns that Mr. Kan, a fiscal conservative who has opposed stimulus packages and backs raising the nation’s sales tax, will not do enough to shore up the economy.

“Investors were speculating that if Ozawa won, Japan would intervene to boost the dollar,” said Yu Yokoi, a foreign exchange dealer at Mizuho Bank.

Mr. Kan has called for Japan to create more jobs, but is viewed by financial traders as less likely to intervene in the currency market to stem the yen’s recent surge. The strong yen cuts into the foreign income of exporters like Toyota Motor Corp. and Canon Inc.

Mr. Ozawa backed more spending, which many economists advocate but which Mr. Kan has resisted because Japan’spublic debt is already twice its GDP.

With the party leadership fight over — at least for the time being — Mr. Kan was expected to focus on pushing policies through a divided parliament, where the Democrats and their junior coalition partner lost their majority in the upper house in July elections.

He is also likely to be grilled over a plan to relocate a major U.S. Marine base now housed on the southern island of Okinawa, a divisive issue that helped force out his predecessor. As he accepted his re-election Tuesday, a territorial spat between Japan and neighbor China showed signs of heating up, with Beijing postponing a senior official’s visit to Tokyo.

Still, Tuesday’s outcome was seen as strengthening Mr. Kan’s mandate, though the prime minister has struggled to get his way in parliament.

“The vote shows that party members listened to the public’s preference for Kan,” said Shinichi Nishikawa, a political science professor at Tokyo’s Meiji University. “The big support he got from regional members should give him a boost of confidence. He’s got the favor of the people on his side.”

Mr. Kan’s most notable policy proposal — that Japan needed to seriously consider raising its sales tax — was a disaster. It came just before the upper house elections, and he was widely blamed for the Democrats’ heavy losses in that vote. Mr. Ozawa and other party members have expressed unhappiness with his lack of decisive leadership.

Mr. Ozawa had problems of his own, however.

A political fixture for 40 years, the veteran was hamstrung by a political funding scandal that made him far less popular with the public than the more populist Mr. Kan. Mr. Ozawa’s troubles are not over — he could face indictment on allegations of funding irregularities as early as next month.

Some analysts have speculated that Mr. Ozawa could split with the party or join the opposition, which would be a major blow to the Democrats. Mr. Ozawa is widely credited with engineering the Democrats’ landslide victory a year ago that unseated the conservatives that ruled Japan for most of the post-World War II era.

Mr. Ozawa denied any such plans in a brief statement after the poll.

“Despite my defeat, I’m grateful to all the support that I received from lawmakers, supporters and party members,” he said. “I will plan to work with you as a rank-and-filer to contribute to a successful leadership of Democratic Party.”

With finding a consensus key to his future, Kan said he would focus on keeping the party together.

“I seek full participation and support from all lawmakers and members of the Democratic Party,” he said.

Associated Press writers Malcolm Foster and Mari Yamaguchi contributed to this report.

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