TOKYO (Reuters) - Japan's conservative Liberal Democratic Party (LDP) surged back to power in an election on Sunday just three years after a devastating defeat, giving ex-Prime Minister Shinzo Abe a chance to push his hawkish security agenda and radical economic recipe.
An LDP win will usher in a government committed to a tough stance in a territorial row with China, a pro-nuclear energy policy despite last year's Fukushima disaster and a potentially risky prescription for hyper-easy monetary policy and big fiscal spending to beat deflation and tame a strong yen.
Exit polls by television broadcasters showed the LDP winning nearly 300 seats in parliament's powerful 480-member lower house, while its ally, the small New Komeito party, looked set to win about 30 seats.
That would give the two parties the two-thirds majority needed to over-rule parliament's upper house, where they lack a majority and which can block bills, which would help to break a policy deadlock that has plagued the world's third biggest economy since 2007.
"We need to overcome the crisis Japan is undergoing. We have promised to pull Japan out of deflation and correct a strong yen. The situation is severe, but we need to do this," Abe said on live TV. "The same goes for national security and diplomacy."
Parliament is expected to vote Abe in as prime minister on December 26.
Analysts said that while markets had already pushed the yen lower and share prices higher in anticipation of an LDP victory, stocks could rise further and the yen weaken if the "super majority" was confirmed.
Top executives of the LDP and the New Komeito confirmed that they would form a coalition. "The basis, of course, is a coalition between the LDP and the New Komeito. But if there's room to cooperate with Japan Restoration Party, we need to do so," said LDP Secretary-General Shigeru Ishiba, referring to a new, right-leaning party that was set to pick up about 46 seats.
"I think there is room to do this in the area of national defense," he said, referring to cooperation with the Japan Restoration Party. The New Komeito is more moderate than the LDP on security issues.
DEMOCRATS' DEBACLE
Exit polls showed Prime Minister Yoshihiko Noda's Democratic Party of Japan (DPJ) winning only 65 seats, just over a fifth of its tally in 2009.
The DPJ, which swept to power in 2009 promising to pay more heed to consumers than companies and reduce bureaucrats' control over policymaking, was hit by defections just before the vote.
Party executive Kohei Otsuka told NHK that Noda would likely have to quit the party leadership over the defeat, in which several party heavyweights lost their seats.
Many voters had said the DPJ failed to meet election pledges as it struggled to govern and cope with last year's huge earthquake, tsunami and nuclear disaster, and then pushed through an unpopular sales tax increase with LDP help.
Voter distaste for both major parties has spawned a clutch of new parties including the Japan Restoration Party, founded by popular Osaka Mayor Toru Hashimoto.
LDP leader Abe, 58, who quit as premier in 2007 citing ill health after a troubled year in office, has been talking tough in a row with China over uninhabited isles in the East China Sea, although some experts say he may temper his hard line with pragmatism once in office.
"The Senkaku islands are inherently Japanese territory," Abe said, referring to the islands that China calls the Diaoyu. "I want to show my strong determination to prevent this from changing."
But he also said he had no intention of worsening relations with China
The soft-spoken grandson of a prime minister, who would become Japan's seventh premier in six years, Abe also wants to loosen the limits of a 1947 pacifist constitution on the military, so Japan can play a bigger global security role.
China's official Xinhua news agency, noting the deterioration in relations with Japan, warned it not to continue its lurch to the right.
"An economically weak and politically angry Japan will not only hurt the country, but also hurt the region and the world at large," Xinhua said. "Japan, which brought great harm and devastation to other Asian countries in World War II, will raise further suspicions among its neighbors if the current political trend of turning right is not stopped in time."
"UNLIMITED" MONETARY EASING
The LDP, which promoted atomic energy during its decades-long reign, is expected to be friendly to nuclear utilities, although deep public safety concerns remain a barrier to business-as-usual for the industry.
Abe has called for "unlimited" monetary easing and big spending on public works to rescue the economy from its fourth recession since 2000. Such policies, a centerpiece of the LDP's platform for decades, have been criticized by many as wasteful pork-barrel politics.
"Quantitative easing by the BOJ will help correct a strong yen and push up stock prices," Abe said ."That will help boost investment and lead to rises in wages, jobs and household revenues. We'd like to shorten the time needed for this to happen."
Kyodo news agency said the new government could draft an extra budget for 2012/13 worth up to 10 trillion yen ($120 billion) and issue debt to pay for it.
Many economists say that prescription for "Abenomics" could create temporary growth and enable the government to go ahead with a planned initial sales tax rise in 2014 to help curb a public debt now twice the size of gross domestic product.
But it looks unlikely to cure deeper ills or bring sustainable growth, and risks triggering a market backlash if investors decide Japan has lost control of its finances.
"It's a pretty big win for the LDP. Abe's economic policies will be implemented so the economy will improve next year. The problem is what happens after that," said Koichi Haji, chief economist at NLI Research Institute.
"Japan can't spend on public works for ever and the Bank of Japan's monetary easing won't keep the yen weak for too long. The key is whether Abe can implement long-term structural reforms and growth strategies."
Japan's economy has been stuck in the doldrums for decades, its population ageing fast and big corporate brands faltering, making "Japan Inc" a synonym for decline.
Consumer electronics firms such as Sony Corp are struggling with competition from foreign rivals and burdened by a strong yen, which makes their products cost more overseas.
(Additional reporting by Chikafumi Hodo, Yoko Kubota, Kiyoshi Takenaka, Leika Kihara and Mari Saito in TOKYO, Yoshiyuki Osada in OSAKA and Sui-Lee Wee in BEIJING; Editing by Robert Birsel and Raju Gopalakrishnan)
