Yasuo Fukuda looks likely to win the leadership of Japan's ruling party on Sunday and become the nation's next prime minister, a job in which he will face a divided parliament and conflicting policy pressures.

Seen as an experienced moderate who can avoid the missteps that plagued outgoing premier Shinzo Abe, the bespectacled Fukuda has won the backing of major factions in the ruling Liberal Democratic Party (LDP) and is firm favorite to win the job.

But a media report on Friday linking a local LDP branch headed by Fukuda to small donations from a business with ties to a pro-North Korea group in Japan could affect the race against former foreign minister Taro Aso, political analysts said.

Links with Korean ethnic groups that support North Korea are controversial in Japan because of an ongoing feud over Japanese citizens abducted by North Korean agents decades ago.

The victor in the leadership race is sure to become prime minister by virtue of the ruling coalition's huge majority in parliament's lower house.

But the next prime minister faces a divided parliament, where combative opposition parties control the upper house, as well as dueling pressures to help out those left behind by recent economic reforms while also reining in a huge public debt.

"Politics is the art of the possible and unfortunately, the possibilities are very limited," said Jesper Koll, president of investment advisory firm Tantallon Research Japan.

"That's the real political risk -- not getting things done."

SOFTER STANCE

Kyodo news agency reported that an LDP branch headed by Fukuda, 71, had received 200,000 yen ($1,740) in donations from a pachinko pin-ball game firm with ties to the General Association of Korean Residents in Japan (Chongryon).

It was unclear if Fukuda had been aware of the donations several years ago from the pachinko firm.

Fukuda's aides declined comment but the Mainichi newspaper quoted his office as saying it had not checked the nationality of the donor and now planned to return the money.

Fukuda has adopted a softer stance toward normalizing ties with North Korea, and the rival candidates clashed on the topic at a news conference on Friday, with Aso, 67, stressing "pressure was needed" and Fukuda calling for a strategy that balanced pressure with dialogue.

Abe, who turned 53 on Friday, suddenly announced his resignation last week after a year in office during which he improved ties with China but was plagued by scandals and gaffes by his ministers that contributed to a humiliating election rout in July, handing control of the upper house to the opposition.

The hawkish Aso -- a fan of "manga" comic books who casts himself as a strong leader -- saw his early lead in the LDP race evaporate suddenly, partly because of his close ties to Abe.

"Aso is part of the old Abe regime. No matter how much he jokes and talks about 'manga', he's still no change," said Chuo University political science professor Steven Reed.

"With Fukuda, going back to the old ways looks like change."

NAVAL BATTLE

Both Fukuda and Aso have pledged to pay more heed to those left behind by economic reforms begun under Abe's predecessor, the charismatic Junichiro Koizumi, whose cuts in wasteful public works spending won plaudits from many voters but angered traditional LDP backers in rural areas.

Abe's conservative agenda including a bolder global security role for Japan and more patriotism in schools will almost certainly take a back seat under the next Japanese leader.

Still, one of the first challenges for the new premier will be a battle to extend past a November 1 deadline for a naval refueling mission in the Indian Ocean in support of U.S.-led operations in Afghanistan.

Though an advocate of a less U.S.-centric foreign policy, Fukuda, like Aso, has stressed the need to extend the mission, which opposition parties are against.

Fukuda has not ruled out using the ruling camp's two-thirds lower house majority to override the opposition-controlled upper house, but has said that would be a last resort.

Analysts said Ichiro Ozawa, leader of the main opposition Democratic Party, would in turn be taking a risk if he forced a showdown over the naval mission, which most Japanese voters now support.

The LDP-led coalition can also use its lower house majority to enact laws, but may be wary of a public backlash if it does.

The alternative -- seeking deals with the opposition -- would make bold policy virtually impossible even as Japan faces a swiftly ageing population and a related spike in welfare spending.

"Now we need politics more than before because there are reforms that need to be done," said Martin Schulz, an economist at Fujitsu Research Institute. "I am not optimistic that we will get major steps in any direction."

No lower house election need be held until late 2009, but pundits say a parliamentary deadlock could spark one sooner.

(Additional reporting by Teruaki Ueno)

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