ANALYSIS - Will Japan PM use his political capital?

Japanese Prime Minister Yukio Hatoyama makes his first speech to parliament at its lower house in Japan, October 26, 2009.

TOKYO (Reuters) - With Japan's public debt set to bulge to more than double GDP this year, new Prime Minister Yukio Hatoyama has little to spend -- except the political capital that is keeping his support rates above 60 percent.

Some pundits say that now is the time for Hatoyama to make some tough decisions about delaying costly spending programmes -- but with another election less than a year away and the economy at risk of slipping back into recession, many wonder if he will.

Support for Hatoyama's cabinet slipped eight points to 63 percent in a Yomiuri newspaper poll published on Tuesday, while 85 percent of the 1,074 respondents said they would rather see some campaign pledges broken than a rise in Japan's already huge debt.

"In terms of spending priorities, it might be possible to prepare public opinion for changes in details in the run-up to the upper house election," said Sophia University's Koichi Nakano. "But it would be risky.

"Even if the majority agree some policies are not needed and are worried about public finances more than manifesto commitments, there is not necessarily agreement on what is not necessary," he said.

Hatoyama's Democratic Party swept to a huge election victory in August pledging to cut wasteful spending and put more cash in the hands of consumers and workers to stimulate growth at home.

But falling tax revenues due to the fragile economy, and a public debt seen topping 200 percent of gross domestic product this year are making it hard to find funds.

The yield curve for government bonds has steepened over the past month on renewed concerns about possible increases in debt issuance later this fiscal year and worries about the size of JGB issuance in fiscal 2010/2011 from next April, prompting increasing concern from the finance minister.

NO GOOD CHOICES

Hatoyama's high support could give him a window to put off keeping some expensive promises, such as an unpopular plan to make highways toll-free or ending a decades-old surcharge on gasoline that will cost the government 2.5 trillion yen ($27.8 billion) in lost tax revenues annually.

But analysts say taking voters at their word could backfire ahead of the election for parliament's upper house set for mid-2010. "Whatever policy is targeted, someone will say 'That's not what I meant'," Sophia University's Nakano said.

Forty-three percent of voters in the Yomiuri survey said they supported the Democrats, more than double the figure for the LDP. But the backing could prove fragile, some experts warn.

"The Democrats' support is broad, but not strong ... and Hatoyama's personal popularity is weak," said Shusei Tanaka, a former economic planning minister who left the then-ruling Liberal Democratic Party in 1993 with Hatoyama and others.

"There is a feeling that voters will allow them some missteps, but if they make a mistake in fundamental policies, their support could fall suddenly," he told Reuters.

A poor showing in the upper house election could revive a parliamentary deadlock and stall policy implementation and a failure by the Democrats to win an outright majority would leave them beholden to two small but vocal coalition partners.

Holding down spending could also risk sending the economy back into recession, given the fragility of its recovery from Japan's worst downturn since World War Two.

And focusing on the market-friendly reforms some economists say are needed could be a tough sell given Hatoyama's promises to voters to pursue a kinder, gentler capitalism.

Hatoyama has also pledged not to raise Japan's 5 percent sales tax for the next five years, although most economists say an increase will be needed to cope with the rising social security costs of the world's fastest-ageing population.

"There are no good choices here," said Robert Feldman, chief economist at Morgan Stanley in Tokyo.

Showing commitment to fixing tattered state finances could help reassure voters and investors, if the plan were credible.

National Strategy Minister Naoto Kan said last week that the government would aim to come up with a medium-term fiscal reform plan around May or June next year and on Tuesday said he wanted to craft a growth strategy by the end of the year.

"We need more granularity," Feldman said. "I don't think investors will be convinced unless they show where demand will come from, what deregulation will be done to generate demand, what components will be cut ... and how they will win the election as a referendum on their proposals." (Editing by Ron Popeski)