The LDP's humiliating performance in Sunday's Upper House poll also leaves serious doubts as to whether a mandate now exists for the sort of sweeping -- but painful -- structural reforms many experts say are vital to ensure future growth.

The party lost 17 of the 61 seats it had up for grabs in polls for half the seats in the less-powerful Upper House. ``It's certainly a referendum on the economy and says that the LDP mismanaged things, but I don't think it's a vote for restructuring -- it's just a vote for more tax cuts,'' said chief economist Andrew Shipley at Schroders Japan.

``Tax cuts are fine but unless they are coupled with deregulation, it is not going to help the economy grow,'' Shipley said. ``The worry is that not even the opposition has the firm desire to restructurethe economy and certainly, households don't.'' Tax reform, including income and corporate tax cuts, is a key issue that markets want addressed quickly, along with financial system consolidation.

The LDP has vowed that ``permanent tax reform'' would include tax cuts but left both voters and markets puzzled as to detailed content and funding. A ruling party tax panel is set to start deliberations on reform from Thursday. On the eve of Sunday's election with the LDP clearly under attack, LDP policy chief Taku Yamasaki -- who will join prime minister Ryutaro Hashimoto in stepping down over the election debacle -- told reporters the income tax cuts would total at least four trillion yen and include a cut in top tax rates to 50 per cent from a current stiff 65 per cent.

The reductions, Yamasaki said, could either be ``permanent'' or a combination of permanent and one-off cuts. Expectations are growing that the LDP, in its desire to regain lost ground, will yield tax cuts of more than four trillion yen.

``Thescale of income tax cuts is likely to increase or else the steps won't pass parliament,'' said a senior economist Mikihiro Matsuoka at Daiwa Research Institute. ``But what will they do about funding ? ''

``In a sense, irresponsible fiscal spending may proceed at a faster pace,'' Matsuoka added.

A junior LDP member said on Monday that how to fund the tax cuts was still the biggest headache. ``During the campaign period, everyone was saying big amounts, but we haven't had a discussion over how to finance it and that's the big question,'' LDP parliamentarian Yoshimasa Hayashi told Reuters Television.

Worries about Japan's worsening fiscal bind were a major factor behind US rating agency Moody's Investors Service's decision to lower its outlook on the country's sovereign debt rating to negative from stable in April.

Analysts have said prospects are slim that Japan, the world's largest creditor nation, will default on its government debt, but added Tokyo's big budget deficit places serious long-termconstraints on using fiscal policy to bolster growth.

Outstanding public sector debt held by both local and central governments is now almost 100 per cent of gross domestic product (GDP) and on an annual basis was 5.9 per cent of GDP in fiscal 1997-98 alone. Worries over the ballooning deficit and the spectre of a rapidly ageing population prompted the government to pass the fiscal reform law late last year, requiring a lowering of the annual deficit ratio to three per cent or less in 2003-04.

But faced with the nation's first recession in nearly a quarter century, the LDP revised the fiscal reform law earlier this year to allow delay of the target date to 2005-06.

The move was needed to fund a massive 16 trillion yen-plus stimulus package unveiled in April which included temporary income tax cuts of two trillion yen this year and two trillion yen next year. New bond issues to pay for the package will raise the ratio of fiscal deficit to GDP to about 6.7 per cent in 1998-99. The government now lookslikely to seek a second revision of the fiscal reform law to finance further tax cuts, since a revenue-neutral mix under which it would trim top tax levels but lower the minimum taxable income level looks neither politically feasible nor desirable given the need for short-term stimulus.