Sept. 8 (Bloomberg) -- Japan will sustain a recovery in its $4.5 trillion economy should Prime Minister Junichiro Koizumi win national elections on Sept. 11, economists say. They say the same for a victory by opposition leader Katsuya Okada.

The election of either Koizumi or Okada won't derail the economy's longest expansion in eight years because, for the first time since 1991, the recovery is being fueled by domestic consumer and capital spending, not exports and government money, said Kiichi Murashima, head of economic and market analysis at Nikko Citigroup in Tokyo.

Both Koizumi and Okada say they will cut spending, reduce the national debt and balance the budget within a decade.

``The economy will continue this gradual recovery led by private domestic demand,'' Murashima said. ``Any changes in economic policy brought on by the election probably won't alter that scenario.''

Economists such as Murashima and Nomura Holdings Inc.'s Takahide Kiuchi say the momentum for growth can be sustained as companies such as Toyota Motor Corp. increase investment, raise wages, and spur consumer spending, which accounts for more than half of the economy.

Japan's economy expanded at an average 3.3 percent pace in the first six months of 2005, more than double the average 1.3 percent of the past five years. Capital and consumer spending accounted for almost all of Japan's 1.1 percent annual growth in the first quarter.

That contrasts with April 2001 when Koizumi became prime minister and the economy was in its third recession since the so- called asset-price bubble burst in 1991. Japan's public debt had soared as the government poured money during the 1990s into building roads, bridges and other public works projects in a bid to boost growth.

Spending Cuts

In his first year in office, Koizumi cut spending on infrastructure projects by 10.8 percent. Bankruptcies, which were at their second highest ever when he took office four years ago, have fallen by a third and banks have cut their ratio of bad loans to total debt by half.

Both main parties in the election are likely to continue spending cuts and financial restructuring, economists said.

``It's unlikely that the next administration will stray far from pursuing structural reforms,'' said Kiuchi, a senior economist at Nomura Holdings Inc.'s Financial and Economic Research Center in Tokyo. ``Even if the Democratic Party of Japan takes power, they will continue to push for fiscal reform.''

Economic growth will continue in the current fiscal year ending March 31, the first four-year expansion since 1997, according to economists surveyed by Bloomberg.

Election Fillip

Still, investors including Robert McKillop say Japan's markets may get a bigger post-election boost from a victory by Koizumi because the transition would be faster, speeding up the implementation of policies to promote growth.

``From a symbolic perspective, this is a very important election for Japan as a victory for Koizumi and the coalition would be the most powerful signal yet that the economic model in Japan will change,'' said McKillop, who manages $2 billion in Japanese equities at Standard Life Investments Ltd. in Edinburgh. ``Ultimately the economic cycle will prove a more significant driver of share prices.''

As many as 40 percent of Japan's voters haven't decided who they will support in the elections, a poll by the Asahi Newspaper, the nation's second-largest by circulation, showed on Sept. 5. The report said that Koizumi's Liberal Democratic Party could win about 250 of the 480 seats in the lower house, giving the party its first independent majority since 1990. The LDP has governed for all but 10 months of the past 50 years.

Stocks, Yen

The poll results have encouraged investors to buy stocks and the yen. The Nikkei 225 Stock Average rose to a four-year high on Sept. 5 as the yen gained for the fourth day to almost its strongest in two months.

Koizumi, the nation's longest serving prime minister since 1987, dissolved the lower house of parliament on Aug. 8 after his bill to sell the nation's post office was rejected. He purged his party of 37 members who voted against the sale.

Some investors say the post office bill remains key to the restructuring of the country's financial system.

``The post office is one of the main obstacles to efficient allocation of capital in Japan,'' said Simon Davis, chief investment officer for Asian equities at Putnam Investments in London. ``Allowing market forces to operate freely in the financial system would be greatly to the benefit of the Japanese people and the Japanese economy.'' Boston-based Putnam oversees $196 billion.

The prominence of the post office vote has made it a factor in the election for many voters, pushing consideration of the economy into the background.

Postal Vote

Only 8.5 percent of 1,990 voters surveyed by the Yomiuri newspaper, Japan's largest by circulation, on Aug. 24 to Aug. 26 said that a party and candidate's economic and labor policies would be the most important factor in deciding for whom to vote, compared with 31 percent who cited the post office sale as the most important issue.

Part of the apathy toward economic policy may stem from the fact that both the main parties have similar plans.

Both have said that consumption tax, currently 5 percent, will need to increase to help fund increasing welfare costs.

Okada's Democratic Party plans to cut spending by 10 trillion yen in three years, helped by a reduction in public works and lower salaries of government workers -- policies echoed by Koizumi's Liberal Democrats.

Okada also plans to cap bond purchases at 30 trillion yen, the same promise Koizumi made four years ago, to curb national debt projected to reach 151 percent of gross domestic product by March 2006, the highest in the industrialized world.

Differences in fiscal policy, such as Okada's plan to raise the consumption tax to 8 percent from 5 percent to fund pensions, have had little influence on voters. Koizumi has said he won't raise the consumption tax while he is prime minister. His term as head of the ruling party ends September 2006.

To contact the reporter on this story: Lily Nonomiya in Tokyo at lnonomiya@bloomberg.net

Last Updated: September 7, 2005 11:01 EDT