Japan Democrats take power, tough challenges loom

By Linda Sieg

TOKYO (Reuters) - Japan's next leader Yukio Hatoyama, fresh from a historic election win, faced the task on Monday of forming a government to tackle challenges such as reviving the economy and steering a new course with close ally Washington.

Sunday's victory by the Democratic Party of Japan (DPJ) ends a half-century of almost unbroken rule by the Liberal Democratic Party (LDP) and breaks a deadlock in parliament, ushering in a government that has promised to focus spending on consumers, cut wasteful budget outlays and reduce the power of bureaucrats.

But the untested Democrats, which will face an upper house election in less than a year, will have to move quickly to keep support among voters worried about a record jobless rate and a rapidly aging society that is inflating social security costs.

"Everything begins now. Everything depends on how we can modestly create politics which considers the people," Hatoyama, the wealthy grandson of a former prime minister, told a news conference early on Monday.

Official figures have not yet been released, but media forecasts show the Democrats with about 307 seats in the 480-seat lower house, compared with only 119 for the LDP.

Hatoyama was expected to quickly set up a transition team to prepare to take power but said he would not name his cabinet until the new parliament voted him in as prime minister.

Financial markets are expected to welcome the end to a political deadlock that has stymied policies as Japan struggled with its worst recession since World War Two. The Democrats and its small allies won control of the upper house in 2007.

Analysts say the decade-old Democrats' spending plans might give a short-term lift to the economy, just now emerging from recession, but worry that its programs will boost a public debt already equal to about 170 percent of GDP.

The party has vowed not to raise the 5 percent sales tax for four years while it focuses on cutting wasteful spending.

"The problem is how much the Democrats can truly deliver in the first 100 days. If they can come up with a cabinet line-up swiftly, that will ease market concerns over their ability to govern," said Koichi Haji, chief economist at NLI Research Institute.

The Democratic Party victory ended a three-way partnership between the LDP, big business and bureaucrats that turned Japan into an economic juggernaut after the country's defeat in World War Two. That strategy foundered when Japan's "bubble" economy burst in the late 1980s and growth has stagnated since.

PRESSURE ON DEMOCRATS TO DELIVER

Support for the LDP, which has ruled for all but 10 months since its founding in 1955, has been on a downtrend for years, but charismatic leader Junichiro Koizumi managed to lead the party to a huge election win in 2005 with promises of market-friendly reforms.

Those reforms came under fire even within the LDP for worsening social and income gaps and were further attacked after the global financial crisis tipped Japan into recession.

In an essay published this month in the New York Times, Hatoyama railed at what he called the "unrestrained market fundamentalism" of U.S.-led globalization but at his news conference sought to allay any concerns raised by those comments.