SCENARIOS: Japan heads towards change in August 30 election

TOKYO (Reuters) - Japan looked headed for historic change as the official campaign kicked off on Tuesday for an August 30 election expected to end more than half a century rule by the conservative Liberal Democratic Party (LDP).

A win for the opposition Democratic Party would likely clear a policy deadlock in parliament, where the opposition controls the upper house and can delay government legislation.

The Democrats are promising to put more money in the hands of consumers to boost domestic demand, keep the sales tax at 5 percent for the next four years and reduce bureaucrats' control of policy-making to cut wasteful spending.

The opposition also wants to adopt a diplomatic stance less subservient to security ally the United States while cultivating good ties with Asian neighbors such as China.

Following are possible outcomes of the election for the 480 seats in parliament's lower house.

CHANGE IN GOVERNMENT

The Democratic Party has a good shot at either winning a majority on its own or becoming the biggest party in the lower house and forming a coalition with smaller allies, ousting the LDP from power for only the second time in its 54-year history.

Financial markets would welcome the prospect of a breakthrough in a long-running political stalemate but worry about the ability of the untested Democrats to govern and the impact of their ambitious policies on Japan's huge public debt.

Plans to hand out child allowances and make expressways toll-free have prompted worries of bigger government bond issuance and a rise in bond yields, though the Democrats say they can find funds by cutting waste and tapping special reserves.

Even if they win a majority on their own, the Democrats need help from two small parties, one conservative and one leftist, in order to keep control of parliament's upper house.

A new government, like the LDP, would stress the need to keep a fragile economic recovery on track over repairing Japan's tattered public finances as Japan emerges from its worst recession in 60 years.

A victorious Democrat-led government would quickly focus on keeping voter support ahead of an upper house poll in mid-2010, probably by keeping pledges to boost household incomes. But the new government could be distracted if the opposition turns up the heat over a scandal in which Democratic leader Yukio Hatoyama's aide reported donations from people who turned out to be dead.

INCONCLUSIVE OUTCOME

If the Democrats stumble in the home stretch, the result could be the margin of victory is so small that there is a tug-of-war as both the LDP and the Democrats try to lure defectors or small parties and form a ruling coalition.

That would delay the formation of a new government, although parliament must meet to elect a prime minister within 30 days.

That could happen if the LDP lures back conservative voters with charges that the Democrats are weak on security and unpatriotic, while forecasts for a landslide opposition victory could also prompt some risk-averse voters to opt for the LDP.

A fuzzy outcome could spark a realignment of party allegiances, though not necessarily along clear policy lines.

Smaller parties formed by disaffected lawmakers from one or both major parties might seek to hold the balance of power in a coalition. Confusion would make policy implementation difficult.

RULING BLOC STAYS

Opinion polls suggest the chances at present appear slim but the LDP and its junior partner, the New Komeito, could win a simple majority and stay in power.

Even so, they are certain to lose their current two-thirds majority in the lower house that has enabled them to enact laws rejected by the opposition-controlled upper chamber.

Without the two-thirds majority, Japan's policy stalemate would worsen, at least until the mid-2010 upper house election.

If the policy stalemate drags on, the idea of a "grand coalition" among ruling and opposition blocs could be revived as the only way to break the deadlock.

Aso's predecessor, Yasuo Fukuda, attempted to form such a coalition with then-Democratic Party leader Ichiro Ozawa, only to have the Democrats reject the notion soundly.

(Editing by Sugita Katyal)