Japan leadership race clouds outlook

Ozawa, 68, would probably become prime minister because Kan, as the defeated party chief, would resign and a vote would be held in parliament to pick a new leader.

Ozawa has rejected the notion of splitting the party post from the premiership because of the scandal hanging over his head. A judicial panel of ordinary citizens is to decide in coming months whether he must be indicted over a funding scandal.

Still, Ozawa could in theory choose to let the leader of another political party become premier in order to forge a coalition to break the impasse in the upper house.

Ozawa's backers say he can use his contacts with opposition parties and skills honed over 40 years in politics to do deals with the opposition and smooth policy implementation, including spending to boost the economy.

An Ozawa win might cause the yen to ease against the dollar, since he has spoken of intervening to stem its rise. It could also make the JGB yield curve steepen in response to his propensity to spend while putting off debate on raising the sales tax to fund the rising social welfare costs of a fast-ageing population.

Both Ozawa and Kan have stressed the party won't implode whatever the outcome of the vote. But lawmakers put off by what critics see as Ozawa's authoritarian style and his reluctance to address Japan's fiscal woes might refuse to back him in the parliamentary vote, setting off a battle that splits the party.

There may also be moves towards political realignment, seen by some analysts as Ozawa's real goal. Whether this would lead to policy consistency within the two major parties, the DPJ and the business-friendly Liberal Democrats, is questionable.

Even if the DPJ hangs together, opposition parties could boycott parliamentary debate or hammer Ozawa with questions related to his funding scandal, with no progress made on the budget for the fiscal year from next April.

Ozawa might have to step down as PM, or even call a snap lower house election that neither main party could win, setting the stage for more political confusion.

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