Tokyo -- The

Liberal Democratic Party

and its coalition partners eked out a victory in Sunday's

Lower House

elections, capturing 271 seats -- a couple of notches above the 269 seats needed to maintain an absolute majority. But the LDP itself lost 38 seats, and its power is greatly diminished. Even though voters chose to maintain the status quo, the result is still a slap in the face for current Prime Minister

Yoshiro Mori

and puts him and his party on the defensive.

The stock market largely ignored election results, with the

Nikkei 225

index shedding only 37.81 points to close at 16,925.40. But the political scenario over the short term has drastically changed as the opposition

Democratic Party

gained more power.

At this point, it looks like Mori will retain his post at least until after the Group of Eight summit in July. Current Foreign Minister

Yohei Kono

and Finance Minister

Kiichi Miyazawa

will also stay in the Mori cabinet until then.

Before Sunday, the market was hopeful that LDP leaders Koichi Kato and Taku Yamasaki would gain power, perhaps by threatening to defect to another party. Both are self-styled reformers and their climb to the top would have been positive news for the stock market over the long term, since they are willing to start reining in the government's gargantuan national debt. However, Kato and Yamasaki lost a few good men from their own factions, which means their power to ruffle the LDP's feathers has now waned.

"I think the threat of Kato or Yamasaki leaving

the LDP are gone, and now the market will wait it out until the LDP comes up with a new economic plan," says Yasunari Ueno, chief market strategist at

Fuji Securities


With the market already expecting another economic stimulus package worth about

5 trillion ($47.9 billion) this fall, Ueno says investors will wait to see if Mori can deliver his goods on

Nippon Telegraph & Telephone.


Besides looking to settle the ongoing dispute with the U.S. over NTT's high interconnection rates, Mori also suggested Japan's telecom monopoly could be chopped up for cheaper phone and Internet rates.

If the LDP can strike a deal with the U.S., investors may take it as a sign that Japan is still willing to adopt much needed deregulation and reforms. And if it doesn't, the government will have to act quickly or suffer a sluggish stock market, as disappointed foreign investors pull out of Japan.