Prime Minister Naoto Kan's replacement of unpopular predecessor Yukio Hatoyama last month boosted the Democrats' chances in the poll. But support has slipped back and the party is in danger of falling far short of Kan's own election target.
Below are key policies that could be affected by the outcome of the election:
FISCAL POLICY
Debt woes in the euro zone have turned the spotlight on Japan's own massive debt, which the International Monetary Fund put at 217.7 percent of gross domestic product last year, far worse than Greece's debt-to-GDP ratio of 115.1 percent.
Most of Japan's debt is held by domestic investors, who are less sensitive to credit ratings agency downgrades than foreign investors, but that is slowly changing as the population ages and household savings fall.
Kan, a former finance minister, has made fiscal reform a top priority and analysts say there is now a greater chance of bolder steps to rein in public debt, given his call for tax reform including a possible doubling of the 5 percent sales tax.
A majority of voters agree fiscal reform is needed.
The government last month unveiled a mid- and long-term fiscal reform strategy. But the plan lacked specific ideas on how to meet ambitious targets such as balancing the budget and reducing its debt-to-GDP ratio.
How aggressively the government tackles the problem depends partly on the outcome of the election, including the shape of any coalition.
MONETARY POLICY
The Bank of Japan, which has stressed the need for a credible plan to cut back public debt, sees little need to ease monetary policy and feels it has done enough for now by outlining a loan programme aimed at supporting industries with growth potential.
But some central bankers worry that Kan, previously among the most vocal government critics of the BOJ when it was reluctant to ease monetary policy, may renew pressure for more aggressive monetary policy steps if sharp rises in the yen hurt Japan's fragile recovery.
While the BOJ is independent from the government by law, direct pressure from the premier may be hard to resist.
YEN POLICY
Investors remain reluctant to test the government's tolerance for a strong currency, although Tokyo has not intervened in the market since early 2004.
Kan caused a stir in January when he said he would work with the BOJ to weaken the yen, and that 'it would be nice' if the Japanese currency slipped further.
He has subsequently toed the government line that stable exchange rates are desirable but levels should be set by the markets -- but noted after becoming prime minister that there was a general view that a weaker yen would be better for Japan's export-driven economy.
Special money market funding operations by the Bank of Japan, launched in December and expanded in March, have been seen as a means of trying to keep the yen from rising further.
CLIMATE POLICY
Kan has stuck to a 2020 goal to cut Japan's greenhouse gas emissions by 25 percent from 1990 levels, premised on an international framework in which major emitting countries would agree on ambitious targets.
The more powerful lower house passed a climate bill including that goal and a shortlist of domestic measures to achieve it, but the upper house ran out of time to enact the legislation.
The government is expected to compile a bill with the same goal and submit it to parliament after the election.
POSTAL REFORM
The parliament session ended in mid-June without passage of a bill to scale back postal privatisation. Kan has said he will resubmit the legislation, sought by small coalition partner the People's New Party (PNP), in an extra session expected in the autumn even though its most vocal proponent, PNP leader Shizuka Kamei, has quit the cabinet.
Not all Democratic Party lawmakers are keen on the legislation and banks complain it would give Japan Post an unfair advantage because of an implicit government guarantee.
Japan Post, which has retail banking and insurance services, is the world's largest financial conglomerate with assets of about 300 trillion yen ($3.4 trillion) and its fate could sway financial markets and industry.
The United States and Europe said last month the draft legislation had not addressed their concerns about what they see as the preferential treatment that Japan Post receives compared with private-sector companies.
DIPLOMACY, SECURITY POLICY
Regardless of the election outcome, Japan's foreign and security policies are unlikely to shift drastically.
The Democrats took power promising to steer a diplomatic course more independent of close ally the United States, but efforts by Kan's predecessor Hatoyama to do so hit a roadblock when he failed to find an alternative to keeping a U.S. Marine airbase on the southern Japanese island of Okinawa.
Tokyo and Washington have basically agreed to implement a 2006 agreement to shift the Marines' Futenma airbase to a less crowded part of Okinawa, host to about half the U.S. troops in the country.
But local opposition clouds the outlook for implementation, and experts worry that Hatoyama opened a Pandora's box by fanning anti-base sentiment that could undermine the 50-year-old alliance.
The government will also likely keep stressing the need to deepen ties with other Asian countries including China, given Japan's increasing reliance on the region for economic growth.
(Compiled by Leika Kihara, Hideyuki Sano, Charlotte Cooper, Yoko Nishikawa, Risa Maeda and Linda Sieg; Editing by Sanjeev Miglani)
((yoko.nishikawa@thomsonreuters.com; +81-3-6441-1830; Reuters Messaging; yoko.nishikawa.reuters.com@reuters.net))($1=88.56 Yen) Keywords: JAPAN ELECTION/ISSUES (If you have a query or comment on this story, send an email to news.feedback.asia@thomsonreuters.com) COPYRIGHT Copyright Thomson Reuters 2010. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.
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