* PM calls on opposition to join constructive budget debate
* PM repeats Tokyo to take firms steps on yen as needed
* PM expresses concern about China's maritime activities
* Govt, DPJ eyes 5 tln yen extra budget, no new bonds-Kyodo (Adds Kyodo report on extra budget size, DPJ-opposition meeting)
By Yoko Nishikawa
TOKYO, Oct 1 (Reuters) - Japan's prime minister warned on Friday that the country's huge public debt made its fiscal situation unsustainable and called for multi-party tax reform talks as he struggles with a fragile economy and a divided parliament.
Naoto Kan also repeated his resolve to curb a rise in the yen that threatens to derail Japan's export-led economic recovery. He urged the central bank to do more to fight deflation and expressed hope that opposition parties would join in talks on a extra budget he wants to enact soon. [ID:nTKU106284]
The Japanese government and the ruling Democratic Party are set to compile a 5 trillion yen ($60 billion) extra budget for the fiscal year to March 31 without issuing new government bonds, Kyodo news agency reported, without citing a source.
Japan's core consumer prices marked their 18th straight month of annual declines in August, as deflation grips an economy struggling with a rising yen, slowing exports and a surprise decline in output. But the jobless rate fell and the availability of jobs improved slightly, data showed on Friday.
Kan, who took office in June as Japan's fifth leader in three years, faces a tough time wooing the opposition support vital to enact laws as his Democratic Party of Japan (DPJ) and a tiny partner lack a majority in parliament's upper house.
But efforts to secure such support will be complicated by a row with China.
Kan is under fire for appearing to cave in to Beijing's demands to free a Chinese fishing boat captain detained last month after his trawler collided with Japanese patrol boats near disputed islands in the East China Sea.
POLL SUPPORT TUMBLES
A voter poll by Fuji TV showed on Friday that support for Kan's government had tumbled 15.7 points to 48.5 percent. A majority of respondents said the administration had not dealt with the China boat dispute appropriately.
The prime minister on Friday reiterated that good ties with China, in the process of overtaking Japan as the world's second-biggest economy, were vital, but expressed concern about Beijing's military buildup and aggressive maritime activities.
Kan's government faces the delicate task of reining in debt while keeping the economy going. Japan has built up a huge public debt burden, now nearly twice the size of its $5 trillion economy, during two decades of economic stagnation.
"If the current fiscal situation is left alone, it will be unsustainable at some point," Kan said in a speech at the start of an extra session of parliament.
He also vowed to achieve Tokyo's goal of bringing the primary budget balance, which excludes revenue from bond sales and debt-servicing costs, into the black within a decade.
Kan, whose past calls to debate a hike in the 5 percent sales tax contributed to his party's setback in a July upper house election, said Japan needed a social welfare system its citizens could trust even if that meant added financial burdens for them.
Multiparty debate on tax reform including the sales tax was therefore indispensable, he said, reiterating that he would seek a mandate from voters before deciding on any increase.
EXTRA BUDGET
The government is crafting an extra budget to stimulate the economy by supporting job seekers and families with children, but has been sending mixed signals about the size of the package and how it will fund it.
Some cabinet members, like the economics minister, say new debt issuance should not be ruled out, but the finance minister opposes the idea.
National Strategy Minister Koichiro Gemba has said Japan could fund measures worth around 4.6 trillion yen ($55 billion) by tapping reserves, thereby avoiding new bond issuance.
"The biggest task for this parliamentary session is enacting a supplementary budget to finance economic steps. I sincerely hope for constructive debate among ruling and opposition parties," Kan said in the speech.
Kyodo said his Democrats would meet opposition parties on Monday to discuss the extra budget and how to enact it swiftly. ($1=83.49 Yen) (Additional reporting by Yoko Kubota; Editing by Linda Sieg, Chris Gallagher and Ron Popeski)