The election disaster weighed on Asia by jeopardising Japan's economic recovery, seen as necessary to nurse Asia's bruised economies back to health. Japanese stocks and the yen staged strong recoveries on Monday amid optimism that prime minister Ryutaro Hashimoto's resignation after a disastrous election showing would speed up reform efforts.

The benchmark Nikkei 225 stock average closed up 270.33 points, or 1.68 per cent, at 16,360.39, bouncingback from an early morning drop of nearly two per cent.

Similarly, the yen recovered to 142.47 after earlier sinking by about three yen to 144.50, but Japanese government bonds ended weaker.

Hashimoto announced at an afternoon news conference he would resign as president of the Liberal Democratic Party's (LDP) -- the first step to giving up his role as prime minister -- to take responsibility for his party's routing in Sunday's upper house election.

The focus is now shifting to who will take his place. LDP secretary-general Koichi Kato said a replacement would be named on July 21.

Analysts said foreign minister Keizo Obuchi was the front-runner to replace Hashimoto. His appointment, they said, would bring stability to the markets, ensuring some cohesion in policy.

Hashimoto will leave behind two key policy objectives -- the adoption of a `` bridge bank'' scheme to help the economy work out at least 77 trillion yen ($542 billion) in problem loans and a permanent tax cut -- unfulfilled. Both areseen as crucial to helping Japan right its failing economy.

``He (Obuchi) would be quite comfortable in the position,'' said senior analyst Martin Foster at Standard & Poor's MMS. ``He would just have to push forward the policies Hashimoto has already put in motion.

Other potential candidates include former prime minister Kiichi Miyazawa and former chief cabinet secretary Seiroku Kajiyama.

Traders said the LDP's humiliating showing -- it won 44 seats in the upper house, far less than the 61 it had hoped for -- would turn up the heat on politicians to fix the world's second-largest economy and may be a harbinger of more aggressive ideas for wresting Japan from its malaise.

``The outcome presses home to the LDP that they've got to do more and do it more quickly,'' said manager Coen Kluyver of foreign institutional equity sales at ING Baring Securities.

To be sure, not all parts of the stock market were upbeat. Real estate and securities, two sectors that were expected to benefit from the LDP'snow-jeopardised policies, were among the loss leaders. Still, enthusiasm that the election would bring about swift change remained high.

Traders said the LDP-bashing in the poll suggested the electorate was calling for fresh ideas in dealing with a seven-year economic slowdown that has pushed unemployment and bankruptcies to record levels. ``Market reaction to Hashimoto's step-down was positive, as the people turned their thumbs down and the market is now hoping for more speedy action on the economy.''

said general manager Tsuyoshi Segawa at New Japan Securities Co Ltd. The yen took back ground against the dollar after an early slide, although forex traders were quick to say the currency's undertone remained weak. ``The market wants a leader who will take drastic measures to solve the domestic economic problems,'' said a senior dealer at a US bank. ``A name like Kajiyama could help the yen.''