Japan's Hatoyama disappoints on US base delay, budget

Japanese Prime Minister Yukio Hatoyama's public support has been dented by doubts about his decision-making ability but with few signs he's at risk of being unseated soon, questions about key policies will likely persist.

That means investors will have to put up with uncertainty as Hatoyama's Democratic Party-led coalition seeks to solve a feud with ally Washington over the US bases in Okinawa and juggles conflicting pressures to prop up the economy with spending while reining in Japan's huge debt.

"If Hatoyama is in trouble, there is a possibility he would be replaced before the upper house election but the likelihood of that is extremely low, almost non-existent" said Naoto Nonaka, a political science professor at Tokyo's Gakushuin University.

Hatoyama has headaches on both diplomatic and economic fronts.

The Japanese leader said on Tuesday he would spend a few more months discussing with coalition partners how to resolve a dispute with Washington over a U.S. Marine airbase on Okinawa.

The decision not to decide, which the top U.S. Marine officer called "unfortunate", prompted a flood of media criticism charging Hatoyama was putting the U.S.-Japan alliance at risk.

Washington wants Tokyo to stick to a 2006 deal to move Futenma airbase to a less crowded part of Okinawa as a condition for shifting up to 8,000 Marines to the U.S. territory of Guam.

But the tiny Social Democratic Party has threatened to leave the coalition if Hatoyama fails to keep a campaign promise to seek a site off the island or outside Japan entirely.

IS HATOYAMA DITHERING?

The appearance of diplomatic dithering has boosted concerns that Hatoyama will shy away from other tough decisions, including whether to keep a 44 trillion yen ($491 billion) cap on new bond issuance for the year from April despite falling tax revenues, pressure to avert a slide back into recession and the need to honour campaign pledges to give consumers more cash.

"I think people tend to have an overall impression that there is no established decision-making process in place, not just with regard to diplomacy but with the budget as well and domestic and foreign policy in general," said Hidenori Suezawa, chief strategist at Nikko Cordial Securities. "Both diplomacy and the economy require speed as well as consistency."

The government is racing to finish the draft budget for the year from April 1 by the end of this month, but the deadline was always going to be tough since they took office in September and have revamped the process to try to put politicians in control.

Demands from banking minister Shizuka Kamei, the head of another tiny coalition party, for aggressive spending to bolster the economy are also complicating budget-making.

The Democrats swept to power in the August election on a platform promising to reduce bureaucrats' grip on policy, reorient spending toward consumers, and steer a diplomatic course less dependent on security ally Washington.

But they need the backing of the two small parties to enact laws smoothly, at least until an upper house poll in mid-2010, when they aim to win an outright majority in that chamber.

Keeping the 44 trillion yen cap would require cuts in planned spending of around four trillion from total budget requests of 95 trillion, since tax revenues are likely to total around 37 trillion and the government hopes to find at least 10 trillion or so from special accounts such as foreign exchange reserves.

Surveys show voters, worried about the public debt, would be willing for the government to delay or even drop some campaign pledges, but deciding which ones to target won't be easy.

(Additional reporting by Masayuki Kitano; Editing by Sanjeev Miglani)