Prime Minister Naoto Kan, who came under fire for his response to the massive March tsunami and the radiation crisis it triggered, confirmed his intention to step down at a gathering of ruling Democratic Party of Japan lawmakers, clearing the way for the party to pick a new leader on Monday.
"In a severe environment, I did what I should have done," Kan told party MPs after resigning as party head. He added he would work to achieve his vision of a society that does not rely on nuclear power.
His successor faces huge challenges, including a strong yen seen as a threat to the export-reliant economy, rebuilding from the devastation of the March disasters, ending the radiation crisis at a crippled nuclear plant, forging a new energy policy, and curbing huge public debt while funding the bulging social welfare costs of an ageing society.
Whether and when to raise taxes to curb a public debt already twice the size of Japan's $5 trillion economy is a focus of debate in the leadership race, but any decision by Ozawa on who to back is seen as likely to be decided more by his hopes of boosting his clout than by policy positions.
It was unclear if Ozawa, who heads the DPJ's biggest group despite suspension of his party membership over a funding scandal, would back an existing candidate such as trade minister Banri Kaieda or seek a new contender to support.
There is even speculation Ozawa might back Finance Minister Yoshihiko Noda, the most fiscally conservative of the current contenders.
Ozawa long ago proposed raising the sales tax to fund social welfare costs but in recent years has promoted populist policies to give consumers more spending power.
Most other candidates agree on the need to curb debt but are cautious about the timing of a sales tax hike and oppose higher levies for rebuilding from the March disasters.
"I've known Mr. Ozawa for 43 years and he has never acted based on policies," ruling party elder Kozo Watanabe told Reuters in a recent interview.
But in a sign of how divided the party has become, the Yomiuri quoted a source close to Ozawa as saying: "We definitely cannot trust Mr. Maehara."
Maehara promises to focus economic policy on promoting growth and beating deflation and is the most popular with voters among seven contenders jostling for the nation's top job.
But only DPJ lawmakers can vote in the Aug. 29 party leadership race, the winner of which becomes premier because of the party's majority in parliament's lower house. Should no candidate win a first-round party vote, a run-off will be held between the top two contenders.
DPJ voter support has sunk as it struggled to implement policies in the face of internal feuds and an opposition able to block bills in the upper house.
Maehara and Noda have both floated the idea of a "grand coalition" with the main opposition Liberal Democratic Party (LDP) and its former partner, the New Komeito party, to break the legislative impasse. But both parties have been cool to the idea.
Kan pledged in June to step down but had not specified when. He confirmed his intention to resign on Friday after parliament's upper house enacted two key bills -- one to let the government issue more debt and another to promote renewable energy.
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