* Foreign minister Maehara faces tensions with China, U.S. (Recasts with official announcements of cabinet posts)

By Yoko Nishikawa

TOKYO, Sept 17 (Reuters) - Japanese Prime Minister Naoto Kankept political allies in key posts in a cabinet reshuffle onFriday, signalling he plans to try to press ahead with efforts tocurb the country's huge debt.

In a sign that worries about Japan's fragile economicrecovery could complicate those efforts, Kan was to instruct hisnew cabinet to compile an extra budget for the current fiscalyear to March 31, Kyodo news agency reported.

But funds for the fresh steps would be found without issuingmore government bonds, Kyodo said.

Kan retained Finance Minister Yoshihiko Noda, who earlierthis week oversaw Japan's first intervention in the currencymarkets in six years to stem a rise in the yen and protect theexport-reliant economy.

Noda reiterated on Friday that Tokyo was ready to interveneagain if needed.

Kan, who took office in June as Japan's fifth prime ministerin three years, defeated rival Ichiro Ozawa in a party leadershipvote on Tuesday. Ozawa, a scandal-tainted strategist known forshaking things up, favours spending to stimulate the economy ifneeded, even if that means increasing public debt.

But Kan must now try to unify his fractured party, wherenearly half of the lawmakers voted for Ozawa in the leadershipelection, as he strives to curb the yen's rise and escapedeflation despite a huge public debt.

"This is a new beginning for the Kan administration. Theline-up of this reshuffle is one that will drive reform and willopen a new path for for Japan, which is in a difficult state,"Chief Cabinet Secretary Yoshito Sengoku said.

The Democratic Party of Japan (DPJ) swept to power a year agopromising change after more than 50 years of almost non-stop ruleby the conservative Liberal Democratic Party (LDP), butfloundered under the indecisive leadership of Kan's predecessorYukio Hatoyama, who quit in June after his ratings nosedived.


In a nod to the need for party unity, Kan appointed Ozawabacker Banri Kaieda as economics minister and a Hatoyama ally astrade minister.

Some analysts said, however, that Kaieda lacked the clout toexercise much influence on fiscal policy as Japan tries to reinin public debt already twice the size of its $5 trillion economy.

"Fiscal reform is a matter for the finance minister, who isNoda, and they will stick to their reform stance," said TsuneoWatanabe, a senior fellow at the Tokyo Foundation, a think tank.

Japanese media said Kan had sounded out Ozawa about taking amostly symbolic senior post in the ruling Democratic Party ofJapan (DPJ), but that Ozawa had declined.

Kan ally Koichiro Gemba becomes the new national strategyminister while keeping his post as as party's policy chief job.

Kan has pledged to cap new bond issuance for the fiscal yearfrom next April at this year's level of around 44 trillion yen($512.7 billion) and said he would revise spending pledges madewhen his party swept to power last year if funds fall short. Healso wants to debate a rise in the 5 percent sales tax to fixJapan's tattered finances.

But Kan has also said he would consider an extra budget forthis fiscal year if the economy stumbles, and is expected tostruggle to cap spending given the rising social security costsof Japan's fast-ageing society.

Kan will also be appointing a new foreign minister at a timeof tensions with China over a territorial spat and potentialfriction with the United States over a U.S. military base insouthern Japan.

Seiji Maehara, who now serves as transport minister and isknown as a proponent of strong ties with security allyWashington, will take over as foreign minister from KatsuyaOkada.

Okada, a policy maven with a Mr. Clean image who has beencritical of Ozawa, takes over as secretary-general, the partyNo.2, as the government struggles with a divided parliament wherethe opposition can block bills. ($1=85.81 Yen) (Additional reporting by Masayuki Kitano and Chisa Fujioka;Writing by Linda Sieg; Editing by Nathan Layne and MichaelWatson)