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By Yoko Nishikawa
TOKYO, Jan 28 (Reuters) - Prime Minister Taro Aso warned on Wednesday of the risks of a bare-knuckle capitalism that he said had contributed to the global financial crisis, as he vowed to rescue Japan's economy from recession and create 1.6 million new jobs.
In a sign of an ongoing shift from the pro-market, small government favoured by popular former Prime Minister Junichiro Koizumi during his 2001-2006 term, Aso said leaving markets to themselves had contributed to global economic woes, and called for fair and transparent rules to ensure economic development.
"As governments got too big, societies lost vitality. So many industrialised nations sought small governments, heightening a sense of vitality by allowing individuals and corporations to act freely," Aso said in a policy speech to parliament.
"But entrusting everything to markets won't make things better," he added, citing the subprime loan problem and the global economic downturn that followed.
The ruling Liberal Democratic Party (LDP) has been drifting away from Koizumi's reforms after a backlash against their impact contributed to a big defeat in a 2007 upper house poll, and the global crisis has strengthened the case for government action.
Japan has been spared the need for wholesale bailouts of the sort seen in the United States and Europe, although corporate profits have tanked and jobs are being slashed as the export-driven economy slides deeper into recession.
But on Tuesday, the government launched a 1.5 trillion yen ($16.8 billion) scheme to buy shares in firms threatened by the financial crisis, the latest move to ease the credit crunch that has starved key industries of cash.
Aso, who is struggling with sagging support rates, a divided parliament and a fractious party, stressed the need to quickly enact budget bills to finance measures including fresh spending and tax cuts worth 12 trillion yen.
"By taking drastic measures, Japan aims to become the first country in the world to emerge from this recession," he said.
He pledged to create 1.6 million new jobs over the next three years through a new 400 billion yen fund and other incentives to boost employment in areas such as nursing care.
NOT SO FEISTY
Aso's speech was in sharp contrast with his first address as premier last September, when the 68-year-old leader came out swinging at the opposition and their policies as an apparent prelude to a snap election he was expected to call last year.
His approval ratings have fallen below 20 percent after a spate of policy flip-flops and gaffes. Surveys suggest the main opposition Democratic Party may well win a general election expected by September, making the premier wary of an early poll that could oust his long-ruling conservative party.
"The crisis can also be an opportunity," Aso said. "Changes come with pain, but we cannot fear that. It is the role of politics to show the light at the end of the tunnel."
But with a divided parliament in which opposition parties control the upper house and can delay bills, implementing policies is proving tough.
In the latest sign of the stalemate, Aso's speech was delayed by bickering with opposition parties over a 4.79 trillion yen extra budget that was finally enacted on Tuesday. [ID:nT125844]
On the controversial issue of when to raise Japan's consumption tax from 5 percent to help finance the rising welfare costs in a fast-ageing society, Aso said the government would prepare legal steps by 2011/12.
Some in the LDP had balked at the premier's proposal to raise the tax from 2011 if the economy recovers. But the two sides reached a compromise last week, avoiding a rebellion that would have further damaged Aso's wavering grip over his party.
Aso, whose two predecessors quit abruptly after failing to break the political deadlock, urged opposition parties not to block or delay policies as the economy rapidly worsens.
"What the Japanese people want is not a simple confrontation. Rather, they want politics that can reach conclusions quickly," Aso said. "We cannot afford to delay conclusions for no purpose." ($1=89.11 Yen) (Editing by Linda Sieg and Dean Yates)