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Is it ‘all systems go’ after Abe’s big election win?

Shinzo Abe, Japan's prime minister and president of the Liberal Democratic Party (LDP), places a red paper rose on an LDP candidate's name to indicate an upper house election victory on Sunday, July 21, 2013.
Bloomberg | Getty Images
Shinzo Abe, Japan's prime minister and president of the Liberal Democratic Party (LDP), places a red paper rose on an LDP candidate's name to indicate an upper house election victory on Sunday, July 21, 2013.

The convincing victory by Shinzo Abe's ruling coalition in Sunday's election helps pave the way for long-awaited economic reforms, but only time will tell whether Abe seizes the opportunity to transform the world's third largest economy or follows the same path as predecessors and let reform efforts fizzle.

Abe's Liberal Democratic Party (LDP) and its coalition partner, the New Komeito party, won at least 74 of the 127 seats being contested in the 242-seat upper house election, Japanese media reported early on Monday.

The election is significant because it means the ruling coalition now has a majority in both houses of parliament, making it easier to push through changes.

(Read More: Now or never for consumption tax: Japan LDP member)

The win also raises the likelihood that Japan could get a leader who's staying the course. Since former Prime Minister Junichiro Koizumi ended his five-year term in 2006, no leader has been in office for longer than 15 months.

"It's all systems go now and the focus is very clear," Jesper Koll, head of Japanese equity research at JP Morgan Securities, told CNBC Asia's "Squawk Box." "The first six months of Abe's rule was all about getting a cyclical upturn, now it's going to be focused on getting a structural upturn so that Japan's potential growth rate can be revised up."

The benchmark Nikkei-225 stock index edged up on Monday amid optimism that with the upper house election over, Abe can focus on implementing the final part of his three-pronged strategy to boost growth and end the deflation that has hampered Japan's economy for years.

Aggressive monetary stimulus and fiscal spending have already helped give Japan's economy a boost this year and economists say it's the third part of Abe's strategy of structural reforms that are key to the long-term economic outlook.

Potential reforms include joining the Trans-Pacific Partnership, a trade deal that is expected to pave the way for opening up sectors such as agriculture to foreign competition, reforming the corporate tax structure and introducing a consumption tax as well as labor market reforms such as trying to bring more women into the work force.

(Read More: The huge trade deal you've probably never heard of)

Japan watchers say there are two concerns. The first is that Sunday's decisive election win will make Abe more complacent about delivering painful economic reforms or taking on vested interests within his own party. The second is that Abe will prioritize his nationalist agenda before economic reforms.

"We've had a very successful election; the problem is all these members [of parliament] have their own agenda and will they support the difficult and important structural changes Abe is talking about? This will be important," said Stephen Nagy, an assistant professor at the Department of Japanese Studies at the Chinese University of Hong Kong.

According to HSBC Economist Izumi Devalier, Abe's biggest challenge could come from within the LDP.

"Abe is in the best position to push through reforms since Koizumi," she said. "But he does have to deal with vested interests. After this election, the LDP will have upwards of 400 members and voices on agriculture, labor [reform] are divided so his biggest enemies will be within his own party."

She said one reason Abe was unlikely to put nationalist policies such as changing Japan's pacifist constitution before economic reform was caution from the LDP's coalition ally, the New Komeito, which could "rein in any nationalist impulses."

(Read More: Japan fires 'third arrow,' but will it work?)

Other Japan watchers pointed to the poor the track record of Japanese prime ministers, many of whom were hopeful of reforming the economy but ultimately failed. Japan has suffered from deflation for 20 years and its economic performance has generally been meager compared with its peers.

"You have to be very skeptical," said Richard Jerram, chief economist at Bank of Singapore. "We've had every prime minister in the past 20 years, and there have been about 15, that have had a structural reform program. They've all promised and not delivered on that front."

— By CNBC.Com's Dhara Ranasinghe, Follow her on Twiiter: @DharaCNBC

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