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FACTBOX: Policy challenges facing Japan's new government

Wed Sep 16, 2009 3:40am EDT

By Yoko Nishikawa

(Reuters) - Japan's new prime minister, Yukio Hatoyama, faces a raft of challenges including growing social welfare costs in a rapidly aging society and tattered public finances.

Following are major challenges for the new government:

ECONOMY

Japan has crawled out of its longest recession since World War Two but economists say it could lose momentum later this year, with deflation and job cuts weighing on the world's second-largest economy.

The Bank of Japan is already forecasting two years of deflation, and if it persists longer than expected it could delay the BOJ's exit from very low interest rates.

Hatoyama's Democratic Party has vowed to put more money in the hands of households to help the economy, but some analysts worry that its spending plans will inflate a public debt already about 170 percent of GDP, the highest among advanced countries.

The party will need to act quickly if it wants to compile the state budget for the fiscal from next April by the end of December, as usual, because it will take time to overhaul the structure of annual budgets as it has promised.

The Democrats' ability to bring elite bureaucrats to heel will also be tested. The party made curbing the clout of bureaucrats over policy-making a key plank in its platform.

Aging POPULATION, SALES TAX DEBATE

One of Japan's biggest challenges is to revamp and pay for soaring costs of health, social welfare and pension measures as a wave of postwar baby boomers retire.

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