TOKYO (Reuters) – Japan named fiery Deputy Prime Minister Naoto Kan as finance minister yesterday, turning to a politician with less hawkish fiscal views than his predecessor and leaving bond markets unsure the heavily indebted government would hold down spending.

Kan, who takes over after 77-year-old Hirohisa Fujii stepped down for health reasons, is a critic of the Bank of Japan for being too rosy in its view of the economy and has pressured the central bank into easing its already hyper-loose monetary policy.

Kan may also be less tolerant of letting the yen strengthen and putting at risk a fragile export-led recovery from Japan's worst recession since the Second World War.

Fujii's departure — despite pleas from Prime Minister Yukio Hatoyama to stay — was another blow to the Democratic Party-led government as it struggles with falling ratings ahead of a crucial mid-year election.

"Fujii made a lot of effort to strike a balance between supporting the economy and maintaining fiscal discipline. He was a key player in making sure the government stuck with its bond issuance goal. Kan seems to be different. He cares more about the economy, so might be less strict than Fujii on fiscal restraint," said Koichi Haji, chief economist at NLI Research Institute.

"I don't think Kan will directly ask the Bank of Japan for radical steps such as increasing its bond purchases. But his inexperience in handling economic policy and in communicating with markets is somewhat worrying."

A former grass-roots activist who with Hatoyama founded the Democratic Party more than a decade ago, Kan is unlikely to favour reckless spending given that public debt is nearly 200 percent of GDP.

But he tends to be gloomy about the economy and is not very experienced in budgetary matters, and it remains to be seen whether he will resist pressure to spend more if the economy sags again just after emerging from a deep recession.

Hatoyama only took office in September, overturning almost five decades of unbroken rule by the conservative Liberal Democrats, but his popularity has sagged due to a growing view he is indecisive.

Finding a replacement for Fujii among the ranks of largely inexperienced Democratic Party lawmakers was a big test for Hatoyama ahead of an upper house election this year.

The party needs to win a majority there to reduce its reliance on tiny but noisy coalition partners who can stymie its policy programme.

Hatoyama settled on Kan without dragging things out, but his choice could well bolster the impression the prime minister is under the thumb of party mastermind Ichiro Ozawa.

Other possible candidates have testy relations with Ozawa, now the Democratic Party No. 2 and seen by many as running things behind the scenes.

"This means that Ozawa's impact has grown even stronger than before," said Yoshiaki Kobayashi, a Keio University professor.

"There will be negative influence (on opinion poll support)."

Hatoyama's ratings have slipped below 50 percent in some polls on voter concerns about his ability to make decisions on policies ranging from a feud with ally Washington over a US airbase to whether to keep campaign promises despite a lack of funds.

The government also suffers from murkiness over who controls policies, as cabinet ministers express competing views and Ozawa appears to pull strings behind the scenes.

Japanese bond yields hit seven-week highs yesterday but are off higher levels seen in November, reassured after Fujii stitched together an annual budget that held down debt issuance next year.

Some analysts said putting Kan in the key post might ultimately make little difference and concerns over Japan's ballooning debt were overdone.

"There is a view that Japan faces some sort of fiscal crisis and that Mr. Fujii was the man to sort of keep spending under control," said Jonathan Allum, Japan strategist at KBC Financial Products in London.

"I personally think all these fears are hugely overstated, and take the very simple view that if Japan was facing a fiscal crisis why are bond yields below 1.5 percent and why is the yen strong? In debt crises these things don't happen."