TOKYO - Frustrated Japanese voters look set to sweep the opposition to victory in Sunday's election, but the novice Democratic Party will quickly face the challenge of an economy suffering from record jobless rates and deflation.

A clear Democratic Party win would end more than half a century of almost unbroken rule by the conservative Liberal Democratic Party (LDP) and break a deadlock in parliament, where the opposition and its allies control the less powerful upper chamber and can delay bills.

Yukio Hatoyama's Democrats have promised to focus spending on households and reduce the power of bureaucrats, whose long hold over policy has been blamed for Japan's inability to cope with deep problems such as a shrinking and rapidly aging population.

The Democrats also want to forge a diplomatic stance more independent of close security ally the United States.

We will do absolutely everything to make sure you can say it was a historic day that changed society to one where we participate and protect ourselves, from one that left everything to bureaucrats, Hatoyama told a crowd in southern Japan.

The world's second-biggest economy is struggling to emerge from its worst recession in 60 years, with the jobless rate hitting a record high of 5.7 percent in July.

The rise to a record high in the jobless rate was well expected, but the worsening job and income situation highlights worries about the Japanese economy heading into a double dip (recession) as government stimulus runs out, said Yuichi Kodama, an economist at Meiji Yasuda Life Insurance.

Financial markets would welcome an end to the political deadlock, but the Democrats' spending plans and vow to keep the sales tax at 5 percent for the next four years has raised concerns that Japan's already huge public debt will grow further.

The Mainichi newspaper, based on a detailed survey, said the Democrats were likely to win a two-thirds majority in the 480-member lower house, a forecast in line with other polls.

A big victory would mean the Democrats would have to pay less heed to their small allies, making policy formation easier.

A win of 269 seats or more would give the Democrats control of all standing committees in the lower house, while a two-thirds majority would help them to push through laws even if they lose an upper house poll set for mid-2010.

ROCKY RECOVERY

The Democrats argue their shift in spending priorities toward households and away from companies will stimulate growth by boosting demand at home while tackling longer-term problems such as creaking pension and health care systems.

Japan is greying more quickly than any other developed country, inflating social security costs. More than a quarter of Japanese are set to be 65 or over by 2015.

Wage growth has been plunging, and the Democrat's policies will go some way to making up for this, said Simon Wong, regional economist at Standard Chartered in Hong Kong.

The Democrats should take the first step and implement what they've promised. This should be more effective than another stimulus package, Wong added.
But economists also warn that Japan's nascent recovery after a return to growth in the second quarter faces a rocky road since it was based on short-term stimulus efforts around the world. Ordinary voters are also worried.

Even if the Democrats are elected, I don't think the unemployment rate will go down, said Kensuke Kubo, a 51-year-old white-collar worker in Tokyo. So they need to prop up the safety net and figure out a tax system that ... puts money in workers' hands and then I think consumption will rise.

Figures released on Friday also showed deflation was taking root for the second time in less than five years.

The Democrats, who have publicly declared their support for central bank independence, might nonetheless ask the Bank of Japan to support the economy by keeping interest rates low.

Prime Minister Taro Aso and his LDP have tried to woo voters by stressing their efforts to revive the economy with steps including a record budget for the current year.

But Aso and others acknowledge that a rise in corporate activity has not yet filtered through to ordinary citizens.

Voters may hope they will fare better with direct aid rather than the LDP's traditional focus on business, but a new government will face a tough task, said Yoshiaki Kobayashi, professor of political science at Keio University.

There is no country in the world that has achieved economic growth while their population is shrinking. The question is whether the Democrats would be able to achieve this, he said.

(Additional reporting by Colin Parrott and Yoko Nishikawa; Editing by Linda Sieg and Dean Yates)

Japan Inflation