Ichiro Ozawa, former secretary general of the ruling Democratic Party of Japan (DPJ), left, and Naoto Kan, Japan's prime minister and leader of the DPJ, take their seats before a panel discussion for their party's presidential election at the Japan National Press Club in Tokyo, Japan, on Thursday, Sept. 2, 2010. [Photo: CFP]

Prime Minister Naoto Kan on Thursday engaged in a no-holds-barred debate with Ichiro Ozawa who seeks to oust the prime minister as head of the ruling Democratic Party of Japan (DPJ) in the upcoming leadership election on Sept. 14.

In the two-hour televised panel discussion held at the Japan National Press Club, Kan said he hoped to change "Japan's money- tainted political culture," urging the former DPJ No. 2 to fully explain his involvement in a political funds scandal.

Ozawa, dubbed the "Shadow Shogun" for his backroom style of politics, is currently under review by a judicial panel as to whether to pursue charges against him over alleged false financial reporting by his fund management body.

During the debate Ozawa maintained his innocence and highlighted the fact that prosecutors had already dropped the case twice.

Ozawa kept his sights firmly fixed on the nation's dire fiscal health during the debate and said he had plans for big cuts in income and residential taxes and stressed the need to cut wasteful spending.

"I think we need to transform the economy into one that does not rely on external demand," the DPJ powerbroker said.

Ozawa has been vocally critical of Kan's leadership ability and blames Kan for the DPJ failure to secure a majority in the Upper House.

Kan made public his plans for a possible rise in the 5 percent sales tax before the July upper house election, which almost certainly cost the ruling bloc its majority in the chamber, meaning the passage of bills now becomes a more arduous task for the ruling party.

Ozawa said he was not averse to discussing sales tax, but promised -- as Kan has also done -- not to raise the levy before a lower house election that must be held by late 2013.

"I am thinking of big cuts for income tax and residential tax. I think it is fine to debate the tax system in general, including the sales tax," he said.

Ozawa in a recent statement said that if he becomes Japan's next prime minister, he will intervene in currency markets to weaken the yen and take "every measure" to keep the yen from rising.

The yen last weak hit a 15-year high against the U.S. dollar and its persistent strength is severely hampering the pace of Japan's export-led economic recovery.

The former DPJ secretary general also pledged to introduce a 2 trillion yen (23.7 billion U.S. dollar) economic stimulus, more than double that planned by Kan.

"Room for further monetary policy steps is limited," Ozawa said. "With the global community tolerating a strong yen, it might be hard for solo currency intervention to have an effect. Still, the yen's rise has come to a level where we will need to act with such a determination," Ozawa said during the debate.

Kan for his part said the yen's rise and deflation have caused immediate threats to the Japanese economy, reiterating that he aims to achieve a "virtuous cycle" of a strong economy, strong finances and strong social security by improving employment conditions.

The prime minister said he will take "decisive action" if it proves necessary.

Recent opinion polls indicate that Kan is ahead of Ozawa by about four-to-one in the DPJ presidential race, although Ozawa commands the direct support of 150 lawmakers and a further 60 from former Prime Minister Yukio Hatoyama's intraparty group.

Hatoyama, having first pledged to support Kan, reversed his decision in favor of Ozawa, but Kan has so far been backed by about 70 DPJ lawmakers belonging to a group headed either by transport minister Seiji Maehara or Finance Minister Yoshihiko Noda, in addition to his own intraparty group of about 50 lawmakers.

Kan has also garnered far more public support than his adversary, according to the results of recent polls published in a number of notable Japanese dailies.

In this presidential election, rank-and-file party supporters will be eligible to vote, in addition to 412 DPJ lawmakers, as well as local assembly members.

The 340,000 strong rank-and-file party members or supporters will undoubtedly sway the outcome of the vote on Sept. 14, the outcome of which many political pundits are saying is too close to call at the moment.

The winner of the party's presidential election will almost certainly become Japan's prime minister because the DPJ holds a majority in the more powerful lower house of parliament.

Should Ozawa defeat Kan for the party's top post, he will become the third prime minister since the DPJ swept to power in an historic defeat of the Liberal Democratic Party (LDP) last September, bringing an end to almost half a century of unbroken LDP rule.

Ozawa has largely been credited as the brains behind the DPJ's election success that ousted the Liberals.