* Timing an issue for joining TPP trade initiative
* Powerbroker Ozawa scandal issue shouldn't delay budget
* Passing extra budget could be model for divided parliament
By Linda Sieg
TOKYO, Oct 26 (Reuters) - Japan needs to forge more free trade deals for future growth, but must address the impact on its farmers as a condition of joining a U.S.-led Asia-Pacific initiative, a top party official said on Tuesday.
Business lobbies, worried Japan is lagging behind rivals such as South Korea, want Prime Minister Naoto Kan to offer to take part in the U.S.-led Trans-Pacific Partnership (TPP) when he hosts the Nov. 13-14 Asia-Pacific Cooperation (APEC) summit, which President Barack Obama will attend.
But many Democratic lawmakers fear fallout from such trade deals on Japan's long-protected and politically powerful farmers.
"As a general direction, we agree with the TPP as something that would advance free trade in the Asia-Pacific region. The problem is a matter of timing -- whether Japan will take part early on," Democratic Party of Japan (DPJ) Secretary-general Katsuya Okada told Reuters in an interview.
"Of course, there will be an impact on primary industries ... Unless we have policies to deal with that at the same time, we cannot win public understanding."
Okada, 57, a former DPJ leader, served as foreign minister after the party swept to power for the first time last year promising to change how Japan is governed. He took on the No. 2 party position when Kan reshuffled his cabinet in September.
Okada expressed confidence that a planned 4.4 trillion yen ($54.45 billion) extra budget for the fiscal year to March -- needed to prop up an economy now faltering as the yen flirts with postwar highs -- would not be derailed by opposition demands for the DPJ to drop key campaign pledges or for DPJ powerbroker Ichiro Ozawa to testify about a funding scandal.
OZAWA CONUNDRUM
"This is an extra budget closely related to the people's livelihoods and in a situation where the yen is rising and the economic outlook is very difficult, it is vital to enact it quickly," Okada said.
But he stopped short of saying whether he would urge Ozawa, who faces indictment over the scandal, to appear in parliament.
Opposition parties are pressing for Ozawa to give sworn testimony in parliament. Japanese media have said a possible compromise would be for the 68-year-old political heavyweight to appear before an ethics panel, which does not requiring testimony under oath. But it remains uncertain whether Ozawa would agree.
"This issue is basically a matter for Mr Ozawa himself. We want to respect his decision," Okada said. "But we must not allow the budget to be delayed as a result."
Ozawa lost a challenge against Kan for the party leadership last month, but still has a big following in the party, so DPJ leaders are reluctant to anger him and risk a split.
Okada said he hoped enactment of the extra budget would point the way forward as the Democrats struggle with a divided parliament, where opposition parties control the upper house and can block bills.
Analysts say the easiest option for the Democrats would be to tie up with the second-largest opposition party, the New Komeito, which tends to share its consumer-oriented policy stance. But changing sides may not be that easy for the party, a former partner of the long-dominant Liberal Democrats ousted last year.
"We want to make the extra budget a test case ahead of the regular session of parliament. We are trying to create a model of how we can manage the country in a stable fashion," Okada said.
"What would be best is to get opposition agreement based on content (of bills). Or, if we lack the numbers, it may be necessary to find a partner." (Additional reporting by Sumio Ito; Editing by Nathan Layne)