By Linda Sieg and Leika Kihara
TOKYO (Reuters) - Five years after ending a brief tenure marked by nationalist rhetoric tempered with pragmatic diplomacy, scandals in his cabinet and a devastating election loss, former Prime Minister Shinzo Abe is poised for another shot at Japan's top job.
That prospect is raising concerns that the 58-year-old grandson of a prime minister would worsen already chilly ties with China, while at home pressuring Japan's central bank to take extraordinary steps such as negative interest rates to rescue the economy from recession, a policy prescription that on Thursday sent the yen tumbling.
"What else can we do but hope that he will do better?" said Gerry Curtis, a political science professor at Columbia University in New York, adding, however, that Abe has given little cause for optimism since taking over again as head of the main opposition Liberal Democratic Party (LDP).
"Let's hope that once he becomes PM again, realism will trump ideology."
Abe, a nationalist who took office as Japan's youngest post-World War Two premier in September 2006, quit abruptly after a year in power that was dogged by scandals, a rout for his LDP in an upper house poll and a crisis over Japan's support for U.S.-led operations in Afghanistan. He cited ill-health as the reason for resigning.
In a surprising comeback, Abe was elected LDP party president in September, putting him in pole position to become premier if, as many expect, his party wins the most seats in a snap lower house election that Prime Minister Yoshihiko Noda said on Wednesday he would call for December 16. That would return the LDP, which ruled Japan for most of the past six decades, back in power just three years after a huge election defeat.
Since taking over the party, Abe has visited the Yasukuni Shrine for war dead - seen in the region as a symbol of Japan's past militarism, talked tough on a Sino-Japanese row over tiny islands known as the Senkaku in Japan and the Diaoyu in China and reiterated calls to easing constitutional restraints on Japan's military.
On Thursday, he said he will not yield to China in the islands row and would work to boost Japan's defense spending, which has fallen for the past decade, if necessary in response to China's military buildup.
"If China is going to raise spending, I want to send a message that we will keep pace," he told a gathering of media and business executives.
On the economic front, Abe has called for extreme steps by the Bank of Japan to lift the economy out of years of deflation - such as printing unlimited yen and setting interest rates below zero. He has also cast doubt on a commitment to implement a two-stage rise in the 5 percent sales tax to 10 percent by 2015.
The tax rise, aimed at curbing the biggest public debt burden among advanced nations at more than twice the size of the economy, was Noda's signature policy success during his year in office, but he needed LDP support to enact it.
Opinion polls show the LDP leading over Noda's Democratic Party, which swept to power for the first time in 2009 only to see their support sag, but they don't seem too enthused about an Abe comeback. Only 28 percent of voters surveyed by NHK public TV backed Abe as "most suitable" to be Japan's next prime minister. That compared to 16 percent who picked Noda, while 51 percent said "neither" were suitable.
PRAGMATISM VS NATIONALIST IDEALS
To be sure, Abe - whose core agenda in 2006 was a call to create a "Beautiful Japan" that would restore traditional values, take pride in its past and play a bigger role on the global stage - won praise during his first term for mending ties with China that had chilled under predecessor Junichiro Koizumi.
Some pundits and politicians say Abe would be pragmatic this time too and steer away from exacerbating frictions between Asia's two biggest and tightly intertwined economies.
"He's a hawk, but if he becomes prime minister, he will have to switch to a more realistic stance," said independent political commentator Atsuo Ito.
Abe on Thursday said there was "no room for negotiation" on the island feud, but added it was important to have strategic relations with China to preserve economic ties.
Abe has also suggested Japan should change a landmark 1995 apology for its wartime aggression and a separate 1993 statement on "comfort women" in which Japan apologized for military involvement in forcing women into sexual slavery at wartime brothels, a stance sure to upset South Korea as well as China.
"Leaders do things differently than candidates, but Tokyo and Beijing have painted themselves into a corner," said Jeffrey Kingston, director of Asia studies at Temple University's Japan campus, referring to the row over tiny East China Sea isles.
"There is mutual glowering and I don't think Abe is clever enough or inclined to make much headway on that," he said.
Financial experts say Abe would probably put priority on reviving growth over repairing Japan's tattered finances and might delay raising Japan's sales tax, a move that may lead to a credit rating downgrade and rise in bond yields.
A vocal critic of the BOJ, he wants the central bank to engineer inflation of 3 percent, three times higher than the current target, by printing unlimited yen.
Although the central bank is independent, Abe's threats matter because as premier he would have the authority to pick the successor to BOJ Governor Masaaki Shirakawa, whose five-year term ends in April.
"The most symbolic form of pressure would be how Abe picks the new BOJ governor," said Koichi Haji, chief economist at NLI Research Institute.
"If he opts for a vocal advocate of aggressive easing, the central bank may resort to extreme measures like full-blown QE (quantitative easing). If he picks someone with a milder view, the BOJ will still continue to ease but take more moderate steps."
(Additional reporting by Stanley White; Editing by Neil Fullick)