INSTANT VIEW - Japan's opposition sweeps to victory

TOKYO (Reuters) - Japanese voters swept the opposition to a historic victory in Sunday's election, exit polls showed, crushing the long-ruling conservative party and handing the novice Democrats the job of reviving a struggling economy.

The win by the Democratic Party of Japan ends a half-century of almost unbroken rule by the Liberal Democratic Party and breaks a deadlock in parliament, ushering in a government pledging to focus spending on consumers, cut wasteful budget outlays and reduce the power of bureaucrats.

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KEY POINTS:

-- Exit polls showed the DPJ set for a landslide win, possibly taking two-thirds of the seats in parliament's powerful 480-member lower house. That matched earlier forecasts of a drubbing for Prime Minister Taro Aso's LDP.

-- The Democrats will face a raft of challenges including ballooning social welfare costs in a fast-aging society and tattered public finances.

COMMENTARY:

KOICHI NAKANO, ASSOCIATE PROFESSOR, SOPHIA UNIVERSITY, TOKYO

"The next electoral challenge is going to be the upper house election in about a year. It's going to be crucial how they spend the first year in office, so in that sense they have to get focused very quickly to get things accomplished without wasting too much time on setting up a new scheme of government.

"Otherwise the goodwill may dissipate very quickly and they may face a hostile upper house within a year."

JUN KATO, SENIOR CHIEF ANALYST, SHINKIN CENTRAL BANK RESEARCH

INSTITUTE, TOKYO

"A huge victory for the Democrats will likely increase hopes of clearing Japan's political deadlock, which would give a positive impression to foreign investors, supporting share prices. So for a short-term reaction, the JGBs are likely to be weighed down in reaction to an expected rise in stocks.

"But that would be only temporary and in the medium term, the JGB market will be supported because Japan is expected to stay under deflationary pressure and the economy is seen as sluggish."

MASARU HAMASAKI, SENIOR STRATEGIST AT TOYOTA ASSET

MANAGEMENT, TOKYO

"I don't expect the economy to improve just because the Democratic Party now takes the lead. The party has been saying it will cut back on wasteful spending and that may include stopping stimulus measures taken by the LDP, for instance.

"That said, it's a different story for the stock market. It will more likely ride on a wave of a recovery in the global stock market, rather than on domestic politics, with economic stimulus steps taken around the world having started to have an impact."

MARTIN SCHULZ, SENIOR ECONOMIST, FUJITSU RESEARCH INSTITUTE,

TOKYO

"The timing couldn't be better. The economy is bottoming out. A boost in public sentiment may give a final kick to get economy out of recession.

"Wages and families income distribution is very, very necessary. Old style dependence on exports and public investment needs to change.

"One of the risks is for more public spending and support for domestic demand by the government and inflation fears may show up and interest rates may go up. But public spending by government won't be punished by the market because rates are still low and so are prices.

"The DPJ were smart enough that they will never question the freedom of BOJ to do policies and set rates. This is very necessary to calm international financial markets and currency markets."

TORU TANAKA, SENIOR MANAGER, TREASURY & FOREIGN EXCHANGE,

MITSUBISHI CORPORATION, TOKYO

"The first impression is that the yen will weaken with the market in a risk-taking mode. That is what the trend is, and equities are holding firm."

"The reason the dollar is now near 93.50 yen is not because the yen has risen on any hopes for the Democratic Party's policies. I think factors such as currency hedging by Japanese institutional investors and exporters have led to the rise in the yen."

"But that will end in August, and rather than rise further, the yen will probably weaken gradually."

NAOMI HASEGAWA, SENIOR FIXED-INCOME STRATEGIST, MITSUBISHI

UFJ SECURITIES IN TOKYO

"The JGB market is likely to take its cue from moves in stocks in the near term. JGBs could see some selling if the stock market rises, welcoming the new stable government.

"But even if JGBs fall, losses would be limited as investor demand is now strong due to huge government debt redemption in September. Also, poor macroeconomic conditions is unlikely to allow JGB yields to climb much."

PELHAM SMITHERS, HEAD OF ASIAN EQUITIES, PALI INTERNATIONAL,

LONDON

"If it's a clear cut victory as that exit poll suggests, it should be viewed positively by financial markets. For equities positively, negatively for bonds. DPJ has been quite emphatic about further pump-priming legislation. So the expectations would be that such victory would result in sizeable fiscal stimulus.

"You have to remember that the DPJ was split off from the LDP. It is not, necessarily considerably different from the existing LDP leadership. Most feel a degree of tiredness in the LDP. In the end the LDP is extraordinarily differential to the Japan civil service. There is a possibility and probability that the DPJ will be able to exercise autonomy from the bureaucracy.

"It's a strong mandate and will make it difficult for the Ministry of Finance to block or water down the fiscal spending packages."

KIRBY DALEY, SENIOR STRATEGIST, NEWEDGE GROUP, HONG KONG

"Sadly this victory does not bode well for the economy.... The policies the DPJ have put forward, while addressing some issues relating to domestic demand, would reverse any thought of fiscal austerity at the heart of Japan's problems.

"The DPJ's spending plans could impact the nation at a time approaching the point of no return with respect to the aging population.... If real reforms are not taken in the next five to 10 years, Japan's fiscal well-being could be beyond the point of no return. This government is not positioned to tackle this issue at all.

"This also smells very much like a 'kick the bums out' election rather than a mandate for the policies of the DPJ, as most Japanese do not truly support the type of fiscal irresponsibility championed by the DPJ.

"The biggest challenge will be paying for programs that they want to implement and tackling the entrenched bureaucracy. Many in the past have spoken of taking on the bureaucracy.... The bureaucracy looks ready for a fight.

"If the DPJ is successful in implementing its spending programs, we will certainly see upheaval in the currency and JGB markets. There has been a lot of complacency over the price at which Japan has been able to issue debt in the last 20 years. If and when Japan goes out to global markets, it will be a very different picture. We could see JGBs reacting to the true fiscal situation."

TOKICHI ITO, DEPUTY GENERAL MANAGER, FOREX TEAM, TRUST &

CUSTODY SERVICES BANK, TOKYO

"The yen could be dragged lower if stocks rise. But the impact may wear off in the early part of the week or maybe even after Monday's Asian trading hours.

"In the near-term, the dollar's upside against the yen is likely to be limited at levels around 95 yen."

JONATHAN ALLUM, JAPAN STRATEGIST, KBC FINANCIAL PRODUCTS,

LONDON

"The mere fact that it is a change I think will probably be taken as a positive sign even if people will have some quibbles about the DPJ policies.

"I think there will be a certain amount of uncertainty.... but the general perception overseas has been that the LDP has probably long outstayed its welcome.

"If it means, which it probably does, improving relations with Japan's neighbors -- Korea and China in particular -- the DPJ doesn't have the kind of baggage the LDP had, then that's probably a positive step."

GERRY CURTIS, PROFESSOR, COLUMBIA UNIVERSITY

"This is not a story about how the LDP, with an unpopular prime minister and facing economic problems, lost an election. This is about the end of the post-war political system in Japan. It is the only time any party other than the LDP has won a majority in the lower house of the Diet (parliament). It marks the end of one long era, and the beginning of another one about which there is a lot of uncertainty."

SHEILA SMITH, COUNCIL ON FOREIGN RELATIONS SENIOR FELLOW FOR

JAPAN STUDIES, NEW YORK

"(Hatoyama) is basically articulating the idea that the U.S.-led, Pax Americana era has come to an end.

"We are going to have some interesting ideas coming out of the DPJ on the foreign policy side.

"My sense of the DPJ is that they have wanted a little distance between Tokyo and Washington."

MICHAEL GREEN, CENTER FOR STRATEGIC AND INTERNATIONAL STUDIES

"This represents a repudiation of the LDP and failures in economic performance and not an endorsement of some fundamental new direction in Japanese policy.

"It will be hard to argue that he has a major policy mandate because the policy prescriptions of the DPJ are so muddy and contradictory."