ANALYSTS warned of a possibly long period of political paralysis and policy-making deadlock in Japan as a result of the stunning defeat of the ruling Liberal Democratic Party in upper house parliamentary elections on Sunday.

Yesterday, Prime Minister Shinzo Abe continued to insist that he would stay in office despite the rout.

However, financial markets yesterday were muted in the reaction. The benchmark Nikkei-225 stock average initially continued a downward slide triggered by the plunge in global equity and credit markets, taking it down to a four-month low. But favourable corporate results in Asia allowed the index to end the day a fractional 5.49 points higher at 17,289.30.

The yen, meanwhile, hit a three-month high against the euro and rose against other currencies as more generalised market turbulence continued.

Markets had factored in the prospect of heavy losses for the LDP in Sunday's election but gloomy predictions yesterday about the impact of the party's defeat on economic and other government policies suggested that markets might not be able to shrug off the weekend's events as lightly as they appeared to yesterday.

There could be months or even up to a couple of years of 'political paralysis' and infighting affecting both the LDP and the main opposition Democratic Party of Japan as a result of the situation in which each party now controls one of the two houses of parliament, veteran political analyst and professor of political science at Columbia University Gerry Curtis predicted yesterday.

An increase in Japan's national consumption tax needed to shore up the strained fiscal situation and to ease the load on the social security system is unlikely now, whether the LDP continues in office or the DPJ is able to seize power by forcing a snap election, Mr Curtis suggested.

Japan's monetary policy could also continue to drift with the Bank of Japan hesitating to raise interest rates in the face of political uncertainty, he said. Fresh from its victory in the upper house, where it secured 60 of the 121 seats being contested, compared with the LDP's 37, the DPJ, under veteran politician Ichiro Ozawa, is expected to block legislation initiated by the LDP-controlled lower house with a view to forcing a general election well before the due date in August 2009. The lower house has powers to override an upper house veto but is likely to use these only sparingly, Mr Curtis said.

Although he and other political commentators argued that Sunday's election result represented in effect a vote of no-confidence in Mr Abe by a large majority of voters, the prime minister was unrepentant yesterday about his determination to stay in office and to promote his unpopular agenda. 'I want to fulfil my responsibility to proceed with reform to build the nation and promote economic growth that the people can feel,' he told a news conference.

Mr Abe also said he would consider personnel changes, including a cabinet reshuffle, at the appropriate time. 'The voice of the people is saying 'renew personnel completely',' he said, while excluding himself from this stricture.

A cabinet reshuffle is likely within a 'matter of weeks', Mr Curtis told the Foreign Correspondents club of Japan, citing what he said were senior officials of the LDP.