By Chisa Fujioka
Sept 13 (Reuters) - The winner of a ruling party vote this week to decide Japan's prime minister faces a raft of challenges, including huge public debt, a rising yen and an ageing population.
Following are challenges facing the government:
ECONOMY
Japan's economy slowed to a crawl in the April-June quarter and analysts see more weakness ahead given a yen near 15-year highs, sluggish domestic demand and flagging growth in major export destinations such as the United States and China.
Kan unveiled last week a 915 billion yen ($11 billion) economic package and has hinted at an extra budget, but any more spending will be constrained by worries over a public debt that is already twice the size of the $5 trillion economy.
Kan's government has pressured the Bank of Japan to do more to fight deflation but the central bank's key policy rate is near zero and it has been loath to take unconventional easing steps.
The BOJ loosened policy earlier this month by expanding a cheap loan scheme, but the move did little to curb yen gains or falls in stock prices as investors saw it as a symbolic gesture.
The yen has shrugged off hints of intervention from the government as investors doubt Japan would risk going solo and have all but ruled out coordinated intervention with other Group of Seven countries.
The yen's surge versus the dollar threatens to derail the recovery by hurting Japan's export competitiveness and stifling corporate investment.
AGEING POPULATION, SALES TAX DEBATE
Japan needs to revamp its social security system so it can pay for soaring health, social welfare and pension bills as post-war baby boomers retire.
Economists say funding these will mean raising the 5 percent consumption tax, one of the lowest among major economies. While many voters agree an eventual hike is inevitable, the timing is politically sensitive because the public wants to first see the government do more to cut wasteful spending.
Kan's proposal for debate on a future tax hike touched a nerve with voters and was blamed by critics for contributing to the Democratic Party's thrashing in a July upper house election.
The Democrats say they will not raise the tax before the next general election, due by late 2013.
FOREIGN RELATIONS
Japan's relations with its biggest ally, the United States, have been frayed over the relocation of a U.S. military base in Japan's southern island of Okinawa, host to about half of the U.S. troops in the country.
The dispute has distracted the two sides and could weaken the 50-year-old alliance as they try to cope with an unpredictable North Korea and a rising China.
Japan's ties with China have improved recently after years of friction over Japan's military aggression in Asia before and during World War Two, although territorial and maritime disputes still erupt periodically and mutual mistrust over military ambitions simmers.
Japan is keen to keep relations with China on an even keel given the two countries' growing economic ties. China has been Japan's biggest trading partner since 2009.
DIVIDED PARLIAMENT
While the Democratic Party and its tiny ally have a majority in the powerful lower house, they lost control of the upper house in a July election, forcing the Democrats to seek help from opposition parties to pass bills.
Opposition parties have ruled out joining the Democrats in a coalition. Kan has said he would reach out to rival parties on a policy-by-policy basis to pass bills, but the process could be long and complicated at a time when Japan needs quick action to lift the economy out of stagnation.
EMISSIONS AND ENVIRONMENT
The Democrats have set a target for Japan, the world's fifth-biggest greenhouse gas emitter, to cut emissions by 25 percent from 1990 levels by 2020, but the goal has met resistance from industries worried about the impact on growth.
The government compiled a climate bill earlier this year that made the target legally binding and set a one-year deadline for Japan to design a compulsory emissions trading system.
But the bill, shelved in June after parliament ran out of time to finish debate, faces an uncertain fate after the ruling bloc lost control of the upper house. (Editing by Tomasz Janowski)