* New foreign minister faces tensions with China, U.S. (Updates with Kan comments at news conference)

By Chisa Fujioka and Yoko Kubota

TOKYO, Sept 17 (Reuters) - Japanese Prime Minister NaotoKan kept allies in key posts in a cabinet reshuffle on Friday,signalling he plans to press ahead with efforts to curb a hugepublic debt as he struggles with a strong yen and weak economy.

He also appointed a new foreign minister, Seiji Maehara, whofaces tense ties with China over a territorial dispute andstrains with ally the United States over a U.S. airbase.

A proponent of close U.S. ties, Maehara has expressed concernover Beijing's military buildup.

Kan kept Finance Minister Yoshihiko Noda, who earlier thisweek oversaw Japan's first intervention in the currency marketsin more than six years to stem a rise in the yen and protect theexport-reliant economy.

"We have conducted intervention against the strong yen forthe first time in six-and-a-half years, and this has had acertain effect," Kan told a news conference. "There is no changein our stance of taking decisive steps against undesirablecurrency moves."

Noda said earlier that Japan was ready to intervene again ifneeded but added it must work to gain global understanding aboutits actions, which have sparked criticism from foreignpolicymakers and raised worries about competitive devaluations.

"I'm aware that there are various opinions. But Japan'sstance is that a prolonged yen rise is undesirable as theeconomy remains in a severe situation with ongoing deflation,"he told reporters ahead of his reappointment.

The Democratic Party of Japan (DPJ) swept to power a yearago, promising change after more than 50 years of almostnon-stop rule by the conservative Liberal Democratic Partybut floundered under the indecisive leadership of Kan'spredecessor Yukio Hatoyama, who quit abruptly in June.


Kan, who took office in June as Japan's fifth primeminister in three years, defeated rival Ichiro Ozawa in a partyleadership vote on Tuesday. Ozawa, a scandal-tainted strategistknown for shaking things up, favours spending to stimulate theeconomy if needed, even if that means increasing public debt.

Kan must now try to unify his fractured party, where nearlyhalf of the lawmakers voted for Ozawa in the leadership poll,while steering through a divided parliament where the oppositioncontrols the upper house and can block bills.

In a nod to party unity, Kan picked Ozawa backer BanriKaieda as economics minister and a Hatoyama ally as trademinister. Some analysts, however, doubted Kaieda would be able toexercise much influence on fiscal policy.

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

Ozawa declined an offer of a largely symbolic party post,and his backers were likely unhappy with their poor showing inthe cabinet rejig. Analysts said the wily strategist would likelystay in the shadows for now, but could reemerge if oppositionparties stall Kan's legislative agenda in parliament.

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

Former Foreign Minister Katsuya Okada, an Ozawa critic with aMr. Clean image, was drafted as DPJ secretary-general and willplay a key role in talks with opposition parties.

Concerns over the government's performance were underscoredby a Reuters poll of Japanese retail investor sentiment whichshowed that 52 percent of respondents felt the politicalsituation had worsened since the DPJ took office.

Kan has pledged to cap new bond issuance for the fiscalyear from next April at this year's level around 44 trillionyen ($512.7 billion).

He also has said he would revise spending pledges made whenhis party swept to power if funds fall short, and wants todebate a rise in the 5 percent sales tax to fix state finances.

But Kan is expected to struggle to cap spending given therising social security costs of Japan's fast-ageing society.

Acknowledging that opposition cooperation was needed to passbills, Kan said he wanted to discuss a possible extra budget forthis fiscal year to March 31 with opposition parties and ifpossible, create a multiparty forum on the social security systemand how to fund it. But he stopped short of any specifics.

"The room for manoeuvring for Kan is very limited," saidMasaaki Kanno, chief economist at JPMorgan Securities Japan. ($1=85.81 Yen) (Additional reporting by Linda Sieg, Kiyoshi Takenaka and YokoNishikawa; Editing by Nathan Layne and Jonathan Thatcher)