Japanese shares rose and the yen largely held its ground in early trade on Monday, with investors seemingly indifferent to a major election loss suffered by Japan's government over the weekend.

Japan's ruling coalition government, under Prime Minister Naoto Kan, had lost an upper house election on Sunday that could prevent it from passing laws smoothly in future.

With Japan already saddled with one of the world's largest public debts by proportion of its economy, many analysts had said Sunday's loss threatens Kan's job and puts into doubt the government's ability to urgently cut debt.

It's political paralysis, said Gerry Curtis, a professor at Columbia University. Kan is not going to quit and it's going to be very difficult to govern.

Yet, defying expectations that the cloud of uncertainty would be bad for Japan's markets, Japanese stocks quickly reversed an early loss on Monday while government bond yields fell.

The market appears to have priced in the government losing its majority beforehand, said Atsushi Ito, a fixed-income strategist at Morgan Stanley MUFG in Tokyo.

But it still remains to be seen how the market digests policy implications going forward.

The Nikkei average climbed 0.5 percent, reversing a 0.5 percent loss at the open.

The dollar rose a touch on the yen to 89.10, up 0.6 percent from levels seen late on Friday.

Still, selling pressure seemed modest, especially in light of the yen and Nikkei's recent strong performances.

The yen had rallied to seven-month highs against the dollar on July 1, while the Nikkei had just managed its best performance in about seven months last week.

Japanese government bond yields, defying expectations for a rise, edged lower. September 10-year futures climbed 0.08 point to 141.29, within sight of a seven-year high of 141.95 hit earlier this month.

The 20-year yield fell 1 basis point to 1.875 percent.

Elsewhere in Asia, investors seemed reasonably upbeat as they waited for a string of U.S. corporate earnings out this week to set the tone in markets.

Stock markets mostly rose across Asia, with the MSCI stock index outside Japan up 0.3 percent. Oil was up 0.1 percent at $76.19, while gold prices dipped a tad to $1,208.90.

Even though markets had a suffered a beating earlier this month on worries the world economy was losing steam in its recovery, Thomson Reuters data suggested strong upcoming U.S. corporate results.

The data showed analyst expect earnings on the S&P 500 to have grown 27 percent in the second quarter. That is up from previous readings in the past three quarters, which hovered around 22 percent.

(Reporting by Koh Gui Qing and Tokyo Newsroom; Editing by Tomasz Janowski)

Japan Nikkei 225