Hawkish Japanese Prime Minister Shinzo Abe vowed to stay in his post despite a crushing defeat for his ruling camp in an upper house election, but policy gridlock loomed and Abe's grip on his job was uncertain.

Voters outraged at a string of government scandals and gaffes and government bungling of pension records stripped Abe's coalition of its upper house majority on Sunday in his first big electoral test since taking office 10 months ago.

"The election expressed the frustrations of the people. He really needs to accept the results of the election and think about the future. This might include quitting," said Akihiro Kodaira, a 38-year-old civil servant.

Abe reiterated on Monday his intention to stay on.

"We must take these results very seriously and reflecting on what we must reflect on ... I want to fulfill my responsibility to proceed with reform to build the nation and promote economic growth that the people can feel," Abe told a news conference.

Abe's bloc will not be ousted from government by the upper house defeat, since it has a huge majority in the more powerful lower chamber, but he said he would reshuffle his cabinet in an effort to win back voter trust.

Abe has also pledged to boost Japan's global security profile and rewrite its pacifist constitution, but his conservative agenda may have to take a back seat.

"Constitutional reform is important, but we need to clearly show that we care about issues close to home, like life in regions and social disparities," Akihiro Ota, head of the junior ruling party New Komeito, told reporters.

FRACTIOUS OPPOSITION

Critics had said Abe was out of touch with voters concerned with bread-and-butter issues such as pensions and health care.

Ichiro Ozawa, head of the main oppositions Democratic Party and a pugnacious veteran who bolted from the ruling Liberal Democratic Party (LDP) 14 years ago, had pledged in the campaign to shrink income gaps and help farmers, long LDP supporters.

Ozawa has vowed to make the upper house win a step towards an early general election, but media warned that his party's public image could suffer if it takes too obstructionist a stance.

Ozawa, who suffers heart problems, has not appeared in public since Sunday's victory. Party officials said he was resting after a tough campaign, but his absence cast doubt on his ability to keep leading his often fractious party.

The Democrats are a mix of ex-LDP lawmakers, former socialists and young conservatives, some of whom are seen as ripe for poaching.

No lower house poll need be held until late 2009, and Abe said he was not considering calling a snap poll anytime soon.

But the soft-spoken, once-popular Abe could face pressure to quit from within his own party, which has ruled Japan for most of the past five decades.

"The truth is that we were defeated. He needs to take responsibility," said Ryosuke Hara, an executive of LDP's local branch in western prefecture of Hyogo.

"For him not to do so when everyone around is resigning would not go well with the people."

For now, though, a lack of suitable successors in the LDP could help Abe survive, analysts said.

POLICY GRIDLOCK

Without ruling coalition control of the upper chamber, laws will be hard to enact, threatening legislative paralysis.

Some analysts noted, however, that Abe had never stressed economic reforms to begin with, in contrast to former Prime Minister Junichiro Koizumi.

"Investors may worry that the LDP's defeat means that the ongoing reform drive will take a back seat, but they won't be greatly disappointed because expectations for Abe as reformer were not high in the first place, compared with his predecessor," said Takahide Kiuchi, chief economist at Nomura Securities.

The election loss came on top of a global shake-out in markets, and the two factors combined to push the Nikkei stock index to a four-month low, although it later made up the lost ground.

The LDP and New Komeito, won 46 seats compared with 60 for the Democrats and well short of the 64 the coalition needed to keep its majority in the upper house.

The election, for half the seats in the upper house, leaves the ruling bloc with just 103 seats, down from 133 before the poll, Kyodo news agency said.

PHOTO CAPTION

Prime Minister Shinzo Abe looks on before his press conference a day after his Liberal Democratic Party made a big loss at the upper house election in Tokyo, Monday, July 30, 2007. (AP)