Il Nuovo Postiglione - Japan's next PM eyes snap election, reports say, as stocks sink

Ishiba, who is set to be formally appointed as premier on Tuesday, supports the Bank of Japan's drive to hike interest rates and has said "there is room" to hike corporate levies.

The leadership contest for the ruling Liberal Democratic Party, which has governed almost uninterrupted for decades, went down to the wire on Friday with right-winger Sanae Takaichi tipped to win when markets closed.

With Takaichi a fan of former prime minister Shinzo Abe's unorthodox "Abenomics" economic policies of ultra-low interest rates and tax cuts, the prospect of her winning sent stocks higher and the yen lower.

Takaichi, an arch nationalist, would also have been the first woman prime minister in a country where men still massively dominate politics and business.

But the last-gasp victory -- on his fifth attempt -- by Ishiba, 67, a fierce critic of Abe, sent the yen soaring to around 142 per dollar -- from around 146.50 -- and on Monday investors dumped stocks, with exporters among the worst hit.

By early afternoon the Nikkei index fell five percent, with Toyota off 7.9 percent, chip firm Tokyo Electron down 7.3 percent and real estate company Mitsui Fudosan 8.3 percent.

Ishiba is finalising plans to dissolve parliament on October 9 ahead of general elections on October 27, local media reported on Monday.

LDP elders are banking on Ishiba, a self-confessed defence "geek" fond of making model ships and planes, to boost the party's popularity.

Its poll ratings fell sharply under outgoing premier Fumio Kishida, hit by a damaging party slush fund scandal and anger over rising prices.

- Defence ties -

On Friday, Ishiba vowed to restore confidence in the LDP after the scandal and to shore up defence ties among neighbours rattled by recent Chinese actions.

Ishiba is considering appointing Katsunobu Kato, a former chief cabinet secretary who ran in the LDP leadership race, as finance minister, media reports said.

Gen Nakatani, a veteran former defence minister, will return to his old job while Takeshi Iwaya, another former defence minister, will come in as foreign minister, the reports said.

Kishida pledged to double defence spending and deepen military cooperation with the United States and other allies in the region rattled by China's rise and an unpredictable North Korea.

Ishiba backs the creation of an "Asian NATO" and has said Japan should respond more strongly in response to Chinese or Russia breaches of its airspace or waters, as has happened repeatedly in recent weeks.

But questions remain over how the government plans to pay for the upgrade, and also find enough recruits for the military among Japan's shrinking population.

Taro Saito, senior economist at NLI Research Institute, told AFP that Ishiba has so far focused on how to improve public finances in Japan, which has one of the world's highest debt mountains.

"He seems not so interested in policies to boost economic growth, although what is most important for Japan is low growth rather than fiscal health," Saito said.

Chief cabinet secretary Yoshimasa Hayashi -- who is reportedly set to remain under Ishiba -- on Monday declined to comment on the fall in stocks but said the government would "make judgements with calm heads".

"We will continue closely watching trends in financial markets at home and abroad with a sense of vigilance, and while cooperating closely with the Bank of Japan, we will do our best in management of the economy and finance," he said.

S.Abato--INP