By Linda Sieg

TOKYO, Aug 31 (Reuters) - Prime Minister Naoto Kan and powerbroker Ichiro Ozawa were expected to meet on Tuesday to try to avoid a clash in a leadership race that could create a policy vacuum as Japan struggles with a strong yen and fragile economy.

But even if a confrontation is averted, big questions would remain about how the rivals would resolve differences over Kan's drive to cut Japan's huge public debt, and how much clout Ozawa will wield over policy and personnel matters in general.

The strife in the Democratic Party of Japan (DPJ) coincides with policymakers' efforts to curb a rise in the yen that is threatening economic recovery.

A Bank of Japan decision to boost a cheap loan scheme at an emergency meeting on Monday did little to weaken the yen, now hovering near a 15-year high against the dollar hit last week.

Kan's predecessor Yukio Hatoyama was arranging the meeting with Ozawa to avoid a split in the DPJ that could well result if the two heavyweights face-off in a Sept. 14 leadership vote, the winner of which would likely become premier.

The Democrats swept to power for the first time just one year ago but have stumbled on economic and diplomatic fronts, struggling to craft a credible plan to end decades of stagnation and straining ties with key security ally the United States.

POLICY GAPS

Kan took over in June after Hatoyama abruptly resigned, his support ratings in tatters.

"If Ozawa doesn't stand and Kan gets re-elected, I think Kan would probably be criticised as being held hostage by Ozawa," said Koichi Nakano, a political science professor at Sophia University.

Japanese media said Ozawa was seeking a senior party post as well as personnel changes including the replacement of Chief Cabinet Secretary Yoshito Sengoku and DPJ Secretary-General Yukio Edano, in return for agreeing not to run in the party election.

Ozawa, 68, has criticised Kan for floating a possible rise in 5 percent sales tax ahead of a July upper house election, defeat in which cost the ruling bloc its majority in the chamber, forcing the Democrats to seek opposition help to pass bills.

He also wants to stick to pledges made before last year's general election to put more cash in households' hands, while Kan has signalled the need to revise the promises given a public debt that is already twice the size of the $5 trillion economy.

Admirers have credited Ozawa with engineering the huge election win that swept the DPJ to power but many voters are put off by his image as a scandal-tainted wheeler-dealer.

Opinion polls consistently show that a vast majority of Japanese voters want Kan - already Japan's fifth premier in three years - to defeat Ozawa in the leadership race.

Ozawa stepped down as party leader last year over a political funding scandal and resigned as the party's No.2 in June.

Party lawmakers have appeared increasingly concerned that the party would fracture no matter who won the leadership race. "Whether Kan wins or loses, the government would be in trouble so he figures the best thing is to do a deal with Ozawa," said independent political commentator Hirotaka Futatsuki.