TOKYO, Dec 1 (Reuters) - Prime Minister Yukio Hatoyama's government, which took office in September, faces a tough balancing act in stopping Japan's economy from slipping back into recession and keeping the country's huge public debt under control.
It has urged the Bank of Japan to do more for the economy at a time when a jump in the yen's value has clouded the economic outlook and deepened deflationary concerns. The BOJ is expected to debate easing monetary policy further to support the economy at a rare emergency meeting at 0500 GMT on Tuesday.
Hatoyama still enjoys healthy voter support above 60 percent, but any return to recession could hurt his novice government ahead of upper house elections next year. Here are some questions and answers on the dilemma for the government.
HOW FAR MIGHT THE GOVT GO IN PRESSURING THE BOJ?
Some in Hatoyama's cabinet have been frustrated with the BOJ's economic view, which they say is too rosy, and fretted over the bank's intention to stop some emergency steps to support corporate financing.
A government declaration about 10 days ago that Japan had entered deflation -- a sustained period of falling prices -- appears to have been a turning point.
Hatoyama will meet BOJ Governor Masaaki Shirakawa this week and a government spokesman said the meeting could touch on whether the BOJ is considering adopting quantitative easing, or flooding markets with extra cash.
Ultimately the government needs to respect the BOJ's independence, which is guaranteed by law, and that probably explains why it has been vague on what it actually wants from the central bank.
Analysts say the BOJ will eventually be pressed to increase its buying of government bonds, or revert to quantitative easing.
DOES THE GOVT HAVE ANY LEVERS IT CAN USE TO KEEP THE ECONOMY OUT OF RECESSION?
The government, largely untested in economic policy, is expected to include measures to deal with the surge in the yen in an economic stimulus package which could be announced this week.
The package is expected to include steps to create jobs and possibly extend subsidies on energy-efficient cars and electronics. It may only give short-term support at best, economists say.
Cabinet ministers have also presented budget requests totalling a record 95 trillion yen ($1.09 trillion) for the next fiscal year, as they try to implement campaign promises Hatoyama made during the election, such as providing child allowances and abolishing a surcharge of about 25 yen per litre on gasoline.
Economists say Hatoyama's strategy to boost domestic demand by putting more money in the hands of consumers is the right step in the long term, but say he lacks a more broad growth strategy.
The government also faces a fiscal dilemma.
Given falling tax revenues, Tokyo's goal to limit new bond issuance in the 2010/11 fiscal year to below the 44 trillion yen earmarked for this year looks in doubt. Investors worry the government's spending plans could inflate a public debt already at 170 percent of GDP, the highest among advanced nations.
HOW BIG A THREAT WOULD A RETURN TO RECESSION BE FOR THE PM?
An economic downturn ahead of an upper house election in mid-2010 would be bad news for Hatoyama and his Democratic Party, which wants to win an outright majority in the upper house to avoid relying on two tiny but vocal coalition allies to get measures passed unopposed.
But voter support is still high, although slipping gradually, and the public knows that Japan's economic woes did not emerge overnight and that the mountain of public debt is a result of huge stimulus spending by previous governments under the long-ruling Liberal Democratic Party (LDP).
The LDP, now in opposition, has not gained much in opinion polls since suffering a huge defeat in the August vote for the more powerful lower house. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Graphic on Japan voter support: http://r.reuters.com/myv63g ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
HOW DOES THIS COMPLICATE HATOYAMA'S CAMPAIGN PROMISES?
Hatoyama's key election pledges, which will cost 7.1 trillion yen in the first year starting next April and rise to 16.8 trillion yen in the fourth year, would be threatened either by a return to recession or Japan's fiscal woes.
But surveys show many Japanese worried about mounting public debt would tolerate backtracking on policy to save money, so this gives Hatoyama some cushion. Pledges that the public says need to be re-examined include abolishing highway tolls, as well as the child allowances and introducing free high school education.
(For more on the government's ties with the BOJ, click )
($1=87 Yen)
(Editing by Dean Yates)
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