Japanese ruling party powerbroker Ichiro Ozawa, challenging Prime Minister Naoto Kan in a party leadership vote, said on Thursday that action was needed to stem rapid rises in the yen that are threatening the economy.

He also said he had plans for major cuts in income and residential taxes and promised not to raise the five percent sales tax before the next general election due by late 2013.

The race between Ozawa and Kan to be the head of the ruling Democratic Party of Japan (DPJ) is too close to call, meaning Ozawa could become Japan's sixth prime minister in three years after the Sept. 14 party vote.

The yen showed little reaction to Ozawa's latest remarks in the debate with Kan on Thursday. Ozawa's policy platform had caught the market's attention on Wednesday by mentioning intervention.

The dollar was down 0.3 percent versus yen at 84.18 yen JPY=, compared to around 84.25 yen before Ozawa's comments on Thursday reached the market.

Financial market players have worried the party battle is keeping the government from dealing with economic woes, including a rise in the yen that threatens Japan's export-driven recovery.

A Bank of Japan decision on Monday to boost a cheap loan scheme has done little to weaken the currency, which is hovering near a 15-year high against the dollar.

Ozawa said that there was only limited scope for monetary policy alone to fix the yen's rise.

Ozawa also said that solo currency market intervention by Japan might not have much impact but that Japanese authorities should be prepared to act.

Room for further monetary policy steps is limited, Ozawa said.

With the global community tolerating a strong yen, it might be hard for solo currency intervention to have an effect. Still, the yen's rise has come to a level where we will need to act with such a determination.

The DPJ swept to power a year ago for the first time promising change, but the party has stumbled on economic and diplomatic fronts, struggling to craft a plan to end decades of stagnation and straining ties with key security ally the United States.

Kan and Ozawa have clashed over fiscal priorities as the government tries to deal with deflation, a weak jobs market and public debt already twice the size of the $5 trillion economy.

Kan has stressed the need for Japan to debate a possible increase in the 5 percent sales tax to deal with growing social security costs for a rapidly ageing population.

Ozawa, however, has stressed the need to focus on cutting wasteful spending, although he said on Thursday that he was in favour of debating tax reforms, including the politically sensitive sales tax.

I am thinking of big cuts for income tax and residential taxes ... I think it is fine to debate the tax system in general, including the sales tax, he said. (Reporting by Chisa Fujioka, Yoko Nishikawa, Yoko Kubota; Editing by Nathan Layne)