But with a growing revolt brewing in his Democratic Party of Japan, Kan appears down to one final option: resign as prime minister.

Kan remains ready for battle, even optimistic. However, his strategy for passing the budget-related bills was dealt a fatal blow Thursday, when 16 Lower House members of the DPJ filed to form a new parliamentary bloc.

Some within the DPJ are now openly talking about having Kan step down in exchange for gaining support for the budget legislation in the Lower House.

In explaining their decision to form a new Diet bloc, the 16 dissenting members did not conceal their anger.

"The Kan government has cast aside the slogan of having politicians take the policy initiative," one DPJ lawmaker said. "It has also abandoned its promises to the people. It has also abandoned the DPJ and eliminated the raison d'etre of those of us who were elected through the proportional representation constituency."

The 16 members were placed on the proportional representation regional blocs for the 2009 Lower House election by Ozawa, who was in charge of election strategy at the time.

Koichiro Watanabe, who will head the new Diet bloc, has known Ozawa for many years. But he said the relationship had nothing to do with the group's decision.

"Although I respect Ozawa very much, we are acting based on our own judgment," Watanabe told reporters.

However, core members met secretly with Ozawa on Wednesday night and informed him of their plans.

After listening to their resolve, Ozawa told them: "Kan is a failure. The DPJ is also a failure."

Younger members of the DPJ group that supports Ozawa have weak electoral bases. They likely want to avoid a snap election if Kan decides to dissolve the Lower House.

But standing by idly was not an option for Ozawa and his followers, since his party privileges are suspended until a verdict is reached in his trial over questionable political fund reports.

With the possibility increasing that Ozawa will join forces with popular Nagoya Mayor Takashi Kawamura, Ozawa may have decided to change tack and move toward toppling the Kan administration.

The decision to form the new Diet bloc was not an abrupt one. Sources said talks to form a new bloc to pave the way for the creation of a new party started late last year.

Those members were not afraid of losing the official DPJ endorsement because they were placed low on the party's proportional representation ballot and had no electoral district. They all felt that they owed their Diet seats to Ozawa.

After consulting with a close Ozawa aide, one member began meeting with each Lower House member elected solely through the proportional representation constituency to persuade them to form a new bloc.

"The party leadership wants to get rid of Ozawa. We want to prepare an entity that Ozawa can join if he has to leave the DPJ," the member said.

They set a goal of having at least 15 members in the bloc because they realized how much power was lost by parties formed last year with fewer than 10 members, such as the Sunrise Party of Japan and the New Renaissance Party.

Bloc members are prepared for the DPJ leadership to reject their request to leave the DPJ Diet bloc. They are even ready to be expelled from the party if they vote against the budget bills.

"The more they try to pressure us, the greater the difficulties Kan will face," one member said.

Bloc members are also hoping for a second wave of DPJ members acting against Kan.

Akira Ishii, secretary-general of the new bloc, met with first-term Diet members who support Ozawa and asked for their cooperation.

While members of DPJ groups loyal to Ozawa and former Prime Minister Yukio Hatoyama may not immediately join the new bloc, it will likely gain a certain level of sympathy from within the party.

Hatoyama said about the bloc's actions, "We all have strong feelings toward the DPJ."

Ozawa's supporters serving their second to fourth terms will remain in the DPJ and vote for the budget-related legislation. They want to stay in the party so that one of their own can run in the DPJ presidential election should Kan resign.

And if that candidate wins, the disciplinary action against Ozawa would be reviewed. One Ozawa supporter said, "If we lose the presidential election, then we can start thinking about leaving the party."

Another Ozawa supporter acknowledged that the formation of the new Diet bloc was a gamble because the public could frown upon the bizarre idea of ruling party members taking the budget bills hostage.

That move was likely taken because the bloc members felt they were being pushed into a corner. But Kan's own corner is getting tighter.

The prime minister planned to pass the budget-related legislation with a two-thirds majority in a second vote in the Lower House after rejection by the opposition-controlled Upper House.

Kan had issued instructions to hold policy discussions with the Social Democratic Party to bring the six SDP Lower House members on board to give the DPJ the two-thirds majority.

Now, the SDP appears ready to cut off policy discussions with the ruling party.

With the 16 DPJ members having left the ruling bloc, the addition of the six SDP members would fall short.

Still, Kan is not backing down. He told a close associate Thursday night, "Ozawa may be dissatisfied with the disciplinary measure, but I will not waver."

Kan appears optimistic that his government can survive even if the new fiscal year starts without passage of the budget bills. He apparently believes that once the unified local elections in April are over, opposition New Komeito will become more cooperative about policy discussions.

But if the budget bills are not passed, new government bonds cannot be issued. Such a development could trigger confusion in the bond market, leading to a drop in stock prices and higher interest rates.

If the child allowance is temporarily halted, voter anger would likely be directed at Kan, not the opposition parties that voted against the program.

And if the already dismal support ratings for the Kan Cabinet fall further, the opposition parties will further strengthen their criticism of the prime minister.

Kan will only be able to maintain a strong stance against the opposition parties if his supporters within the DPJ do not abandon him.

However, signs have emerged that some of those supporters are already looking beyond Kan.

Sources said a DPJ executive who had until now supported Kan asked New Komeito executives this week about the possibility of gaining the party's support for the budget bills in exchange for Kan's resignation.

The DPJ executive also suggested the ruling party was prepared to drastically revise the bill for the child allowance program.

However, the New Komeito executives rejected the request.

Other DPJ groups were talking about a new prime minister.

A member of the party group led by Foreign Minister Seiji Maehara said, "Our only option is to pass the budget bills by replacing the prime minister."

Aides to a Cabinet minister instructed colleagues working at the electoral district office to prepare to print campaign posters because if Kan resigns, a Lower House election would likely be held soon thereafter.

Some within the DPJ are already mentioning names of those who could win over opposition parties as the new DPJ leader. Among those mentioned are Maehara and Finance Minister Yoshihiko Noda.

"I have no intention at all of returning to the old style of politics, such as (an opposition) decision to support these bills would depend on whether the top leader is replaced," Kan told reporters Friday night.

As for the possibility of dissolving the Lower House for a snap election, which Kan had consistently said he would not do, the prime minister commented, "I will act in accordance with what will be important and necessary for the people."

But Tadamori Oshima, vice president of the opposition Liberal Democratic Party, said Friday the LDP would be ready to discuss budget-related bills with the DPJ "if the DPJ changes its top leader."

via Asahi