A historic election win for Japan's opposition Democratic Party on Sunday is likely to buoy Tokyo shares on hopes for less policy deadlock, putting pressure on Japanese government bonds and the yen.

The win 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 pledging to focus spending on consumers, cut wasteful budget outlays and reduce the power of bureaucrats.

Lingering uncertainty over the DPJ's plan to raise 16.8 trillion yen ($179 billion) over four years to fund its economic measures may weigh on Japanese government bonds (JGBs) over the longer term.

But the JGB market has had time to get used to the idea of a Democrat government, and worries about potential increases in debt issuance could be offset by factors such as deepening deflation in Japan.

Both the yen and Japanese government bonds are seen taking their short-term direction cues from the stock market, which is likely to welcome the DPJ's decisive victory, analysts said.

But any market reaction may be short-lived, given that a landslide win by the Democrats was no surprise.

The stock market is likely to respond positively to this and rise, but very soon a mood of caution will set in, said Masayoshi Okamoto, head of dealing for Jujiya Securities.

I think the market's rise may end very quickly, perhaps even as early as the morning, Okamoto said.

If the benchmark Nikkei share average <.N225> rises, the yen was likely to head lower, currency traders said.

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, said Toru Tanaka, senior manager of Treasury & Foreign exchange at Mitsubishi Corporation.

The yen tends to fall against higher-yielding currencies such as the Australian dollar when equities rise and points to a rise in investor risk appetite. That can help weaken the yen against the dollar.

The Nikkei closed at 10,534.14 on Friday, having climbed 50 percent from a trough hit in early March, and holding near a 10-month high of 10,668.74 hit on Wednesday. <.T>

The dollar stood around 93.60 yen in late U.S. trading on Friday, hovering near a one-month low of 93.20 yen hit on Thursday.

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, Mitsubishi Corporation's Tanaka said, adding that the dollar could rise as high as 95 yen to 96 yen this week.

Factors such as currency hedging by Japanese institutional investors and exporters ahead of their half-year book closings at the end of September have likely given the yen a lift recently, but the bulk of such flows may already be taken care of, he said.

The DPJ's win could hurt JGBs over the longer term, said Takafumi Yamawaki, interest rate strategist at BNP Paribas. The sweeping victory of the Democratic Party is a negative factor for Japanese government bonds in the mid- to long-term as investors will focus on concerns over whether the party can really get enough money to fund its campaign promises, Yamawaki said.

Analysts said, however, that the short-term reaction in JGBs will be determined by the stock market.

JGBs could see some selling if the stock market rises, welcoming the new stable government, said Naomi Hasegawa, senior fixed-income strategist at Mitsubishi UFJ Securities.

But any sell-off in JGBs may be limited and yields may dip.

If Monday's industrial production data is worse than forecast, the benchmark 10-year JGB yield could fall below 1.3 percent again, Hasegawa said.

The benchmark 10-year Japanese government bond yield stood at 1.310 percent late on Friday, hovering in sight of a three-month low of 1.270 percent hit in early July.

The current Liberal Democratic Party-led government passed an extra stimulus package this year which entails an additional 16.9 trillion yen in bond issues.

The 10-year JGB yield hit an eight-month high of 1.560 percent in June before the new supply but yields have since fallen, with the debt being reasonably well absorbed while the economy remains weak.

Data released on Friday showed that Japanese core consumer prices fell at the fastest annual pace on record in July.

(Additional reporting by Tokyo bureau)

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