UPDATE 1-Japan govt aims to offset spending freeze with jobs

* Democrats redirecting spending they consider wasteful

* Some worry spending shift bad for economy in short term (Recasts, adds details)

TOKYO, Nov 6 - Japan's government aims to offset the negative impact of freezing part of an extra budget compiled by its predecessor by implementing measures to help create jobs, National Strategy Minister Naoto Kan said on Friday.

Kan said freezing 2.9 trillion yen ($32 billion) in spending from the extra budget could lower gross domestic product by 0.2 percentage point in the year to March 2010.

He added that the government's plan to compile emergency employment measures could create around 100,000 new jobs, which could offset the negative effect on GDP.

"We decided to freeze 2.9 trillion yen, but only around 900 billion yen of that spending was allocated for the current fiscal year," Kan who is also deputy prime minister, told reporters after a cabinet meeting.

"The measures for the labour market that we are considering now are likely to cancel out the negative impact."

The Democratic Party-led government is facing a difficult balancing act as it tries to rejig a budget compiled by the ousted Liberal Democratic Party and compile a budget for 2010/11 that will free up funds for its programmes without stoking fears that the fragile economic recovery will suffer.

Voters swept the Democrats to power in a national election in August as the party promised to cut what it considers wasteful spending, wrest control of the budget process from bureaucrats and increase spending on measures to support households.

Since then, yields on 10-year Japanese government bonds have spiked to a three-month high on concerns that Prime Minister Yukio Hatoyama's party won't be able to reign in spending as cabinet ministers submitted a record 95 trillion yen in budget requests for 2010/11.