TOKYO : Japan's new Prime Minister Yasuo Fukuda on Tuesday kept on his predecessor's finance and economy ministers, leaving analysts cautious about prospects for further free-market reforms.

Fukuda, who has vowed to continue economic reform while easing the pain of rural areas, retained Finance Minister Fukushiro Nukaga and Economic and Fiscal Policy Minister Hiroko Ota along with Akira Amari, the trade minister.

Nukaga, 63, a former defence chief, has been in his post for barely a month. Ota, a 53-year-old former professor, was tapped last year by then prime minister Shinzo Abe, who formally resigned on Tuesday after a disastrous year.

Both have pledged to stay true to free-market reforms, but many analysts doubt whether the new government has the appetite to push through painful public spending cuts after a recent upper house election defeat.

Like Abe, Fukuda's claim to support free-market reforms is "hollow," argued Richard Jerram, chief economist for Japan at Macquarie Securities.

"For the past two years, the focus has been on the problem of inequality, which is likely to remain a barrier to many pro-market reforms," he added.

The world's second largest economy is in the midst of its longest recovery since World War II, according to the government.

Japanese business leaders called for Fukuda's administration to carry on the free-market reform drive in the country.

Masamitsu Sakurai, head of the Japan Association of Corporate Executives, told reporters: "We feel the new cabinet is swinging back a bit in the efforts of structural reform.

"We strongly hope the new government will address and carry out policies toward continuing structural reforms."

Fujio Mitarai, chairman of the influential Japan Business Federation and president of high-tech giant Canon Inc., said: "I hope they will cooperate with opposition parties and carry out policies steadfastly to recover public trust in politics."

But the opposition, which seized one house of parliament in July elections, argues that reforms initiated under Abe's predecessor, Junichiro Koizumi, have hurt the social safety net and regional economies.

Koizumi set out to slash public works spending and break up the post office with its three trillion dollars in assets, which were used to bankroll often wasteful but politically popular public works projects.

Abe in contrast initially appeared to focus more on ideological goals such as educational and constitutional reform, even as polls showed voters were more worried about a perceived widening rich-poor gap.

Following the ruling party's drubbing in the July election that handed control of the upper house of parliament to the opposition, the new government is expected to slow efforts to reduce government spending, analysts said.

"Fiscal spending measures to shrink economic gaps will be a key issue ahead of the lower house general election, which might be held as early as the end of this year," predicted Toru Umemoto, chief forex strategist at Barclays Capital.

"Therefore, we see that there is an increasing possibility that the government will conduct expansive fiscal policy in the near future," he added.

While a slowdown in reforms would be viewed negatively in the long term, in the short run it could be positive for the yen as government spending is likely to spur economic growth and could make it easier for the central bank to justify raising interest rates again, Umemoto added. - AFP/de