The yen hit a seven-week high against the dollar after a crushing win by the Democratic Party of Japan that ends more than half a century of almost unbroken conservative rule and clears the way for an end to legislative deadlock.

Investors drove the benchmark Nikkei-225 index up two percent in early deals to the highest intra-day level of the year but by lunch shares were down 0.35 percent amid worries about the stronger yen, which is bad for exports.

The dollar dropped to 92.59 yen in Tokyo midday trade, down from 93.29 in New York late Friday.

The initial rise in stocks "appears to reflect the market's expectations for the new government," said Katsuhiro Kondo, a dealer at Tokai Tokyo Securities.

"But it is uncertain how positively the DPJ's policies would affect the Japanese economy. Some market participants say its policies are not friendly for big companies. It will take time to assess the new government's ability."

In particular, markets are waiting to see who will take the key cabinet posts.

"We want to know about who will be appointed as the key ministers, including foreign and finance ministers," said Hirokazu Fujiki, a senior analyst at Okasan Securities.

"We also want to know about the strategy on diplomatic relations with the United States and China, which may affect the market."

The DPJ is generally seen as less business-friendly than the outgoing Liberal Democratic Party and has pledged to shift the focus from big business to households to create a more equitable society.

Fujio Mitarai, the head of Japan's top business lobby Nippon Keidanren, urged the DPJ to work with other political parties on economic reforms.

"What's most important as a short-term goal is to secure a recovery from the economic crisis," Mitarai, who is also chairman of high-tech Canon Inc., said in a statement.

Japan Automobile Manufacturers Association expressed concern about the DPJ's ambitious plans to curb greenhouse gas emissions, which it said would "have a large impact on economic activities and employment."

The Democratic Party of Japan (DPJ) scored a crushing victory in Sunday's vote, winning more than 300 seats in the 480-seat lower house of parliament, according to media projections.

The centre-left DPJ has promised to boost household incomes with measures including cash allowances for child-raising, free high-school education, a higher minimum wage, petrol tax cuts and an end to highway tolls.

"There is the prospect of a short-term boost to growth, but its basic economic policy stance is not particularly market-friendly," said Richard Jerram, chief Japan economist at Macquarie Securities.

"The prospects of a stable DPJ-led government for the next three to four years should reduce political uncertainty and allow focus on policy implementation."

The DPJ's victory comes as Japan slowly emerges from a year-long recession caused by a collapse in exports due to the global economic downturn. Its economy grew in April-June for the first time in five quarters.

In a further sign of improvement, factory output rose by 1.9 percent in July from June, marking a fifth straight monthly gain.

But with unemployment at a record high of 5.7 percent and deflation deepening, the fear is that the recovery shoots may soon wilt.

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