TOKYO - Japan's new prime minister ordered the cabinet on Friday to root out wasteful projects in a $154 billion extra budget crafted by his predecessor, but his deputy stressed the aim was to redirect stimulus spending, not cut it.

Yukio Hatoyama's new cabinet, which took office on Wednesday after the defeat of the long-ruling Liberal Democratic Party (LDP), faces pressure to keep his promises to focus spending on consumers, cut waste and reduce bureaucrats' control over policy.

New Finance Minister Hirohisa Fujii told reporters he aimed to find several trillion yen in savings from the review of the 14 trillion yen ($153 billion) budget, adding this could result in less government bond issuance for the year to next March 31.

But he did not specify the amount of a possible cut in the total 44.1 trillion yen worth of Japanese government bond issuance planned for 2009/10, possibly by reallocating some spending to the following financial year.

Deputy Prime Minister Naoto Kan, a former Democratic Party leader who heads a new strategy bureau that sets priorities, signaled the government's commitment to break with old ways.

Under past Liberal Democratic Party governments, ministers got lectures from bureaucrats based on the interests of each ministry and based on that ... made various demands, he told a news conference.

Under our party, or rather, the Hatoyama cabinet, ministers themselves are already showing a stance ... based on the interests of the people rather than ministries' interests.

Transport Minister Seiji Maehara on Thursday gave an indicator that the government intended to keep its promises by saying two costly dam projects might be scrapped.

Kan's National Strategy Bureau will also oversee the budget process. He will have to liaise closely with Fujii and other key ministers, although no one is quite sure how that will work.

REFOCUS SPENDING, NOT CUT

Hatoyama's pledge to cut wasteful spending raised concerns of decreases in stimulus needed to keep on track a nascent recovery.

Kan sought to allay such concerns. We are paying attention to the economy. It is not correct to say we are going to freeze spending. We will be reallocating it.

Finance Minister Fujii echoed that view, saying: This is not a cut but a reallocating on condition that it be used for things that will help people's livelihoods and the economy effectively.

The Bank of Japan has upgraded its assessment of the economy, as exports and output bounced back from a steep fall triggered by the global crisis.

But the jobless rate hit a record 5.7 percent in July, the economy has been hit by deflation, and analysts say recovery is largely due to the temporary effects of global stimulus steps.

The economic climate has not reached a stage where we can let our guard down, Kan said. Employment conditions are worsening. It is a situation that requires careful management.
Finance Minister Fujii said it was too soon to say if another extra budget would be needed for the current fiscal year, but Kan said that common sense suggested one would be needed.

Economists say another budget will be prompted by sliding tax revenues leaving a shortfall of at least 5 trillion yen.

Experts also worry the government will have to borrow more to fund its spending plans, including allowances for families with children, inflating Japan's huge public debt.

Voters who gambled on the Democrats after a half century of unbroken rule by the conservative LDP gave Hatoyama's new cabinet ratings of around 75 percent in several opinion polls.

That was second only to the figures for charismatic leader Junichiro Koizumi, who took power in 2001 promising to reform the LDP and push a market-friendly agenda later attacked by the Democrats and other critics for widening social gaps.

Hatoyama will also have to manage ties with the United States as he charted a diplomatic course more independent of Tokyo's main ally. He meets Obama on September 23 when he makes his diplomatic debut at the United Nations, but will likely sidestep possible flash points.

What is important is to build a relationship of trust, he told reporters. Rather than going into deep discussions, I would like to have talks so both of us can feel that we can work together.

U.S. Assistant Secretary of State Kurt Campbell held initial talks with Foreign Minister Katsuya Okada extending to issues like Tokyo's proposed review of terms of the stay of U.S. troops.

The government is likely to end a navy mission in support of U.S.-led operations in Afghanistan, but is considering some alternative form of support for Afghanistan and Pakistan.

(Additional reporting by Yoko Kubota, Yoko Nishikawa, Rie Ishiguro, Chisa Fujioka and Tetsuhi Kajimoto; Editing by Rodney Joyce and Ron Popeski)

Japan