TOKYO – Japan's Democratic Party, fresh from a landslide election victory, met the central bank governor and senior finance ministry bureaucrats on Tuesday as the transition to a new government stepped up a gear.

Reviving the economy is the Democratic Party's top priority, with unemployment at a record high and investors concerned about deflation and whether the new government will raise spending and increase still further the country's soaring public debt.

Parliament would vote Democratic Party leader Yukio Hatoyama in as prime minister on September 16, a lawmaker said. That would clear the way for Hatoyama to form a cabinet after voters gave his party a sweeping mandate for change in Sunday's election.

Hatoyama is expected to head to the United States the following week to make his diplomatic debut at a U.N. General Assembly meeting and a G20 summit in Pittsburgh.

Japanese media said he would hold talks with U.S. President Barack Obama during the trip. That meeting will be closely watched given Hatoyama has said he wants Japan to forge a more independent stance from key security ally Washington.

Hatoyama exchanged views on economic matters with Bank of Japan Governor Masaaki Shirakawa, while top finance bureaucrat Yasutake Tango met members of the party to discuss the agenda for a meeting of G20 finance ministers in London at the end of the week.

Outgoing Economics Minister Yoshimasa Hayashi warned about the risks of deflation and urged the new government to consider carefully its exit strategy from stimulus measures introduced to help Japan weather the global financial crisis.


Japan's public debt has ballooned to 170 percent of GDP, the highest among developed nations, due to its repeated attempts to spend its way out of the economic doldrums.

Some investors are concerned about fiscal discipline under the Democrats, who have promised policies such as cash handouts for parents of young children, but the party has said it will clamp down on spending in other areas to fund its new policies.

In the Japanese government bond market, there are concerns about a possible spike in government debt issuance, said Noriyuki Fukuda, a fixed-income strategist at Morgan Stanley.

But investors find it's still too early and too uncertain to trade on that.

The Democrats historic election win over the long-ruling Liberal Democratic Party (LDP) in the lower house broke a deadlock in parliament, where the opposition had controlled the less-powerful upper chamber since 2007 and could delay bills.

While investors sought an end to the political stalemate, uncertainty over the new government's direction has weighed on Japanese stocks. The yen strengthened on Monday on the end of the political uncertainty and held its ground on Tuesday.

The Democratic victory was driven more by frustration with the LDP than broad support for the decade-old opposition, explaining a lack of post-election euphoria in the world's second-largest economy.

Besides focusing spending on households, the Democratic Party has promised to 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.

(Additional reporting by Yoko Kubota, Rika Otsuka and Elaine Lies; Editing by Dean Yates)