Yoshihiko Noda was elected head of Japan’s ruling party, paving the way for the 54-year-old finance minister to become the third prime minister since the party took power two years ago.

Democratic Party of Japan lawmakers voted 215 to 177 for Noda, who defeated Trade Minister Banri Kaieda in a run-off after public favorite Seiji Maehara was rejected on the first ballot. The DPJ is set to use its majority in the lower house to appoint him as premier to succeed Naoto Kan tomorrow, making him the country's sixth prime minister in five years.

“I’m firmly resolved to carry this heavy burden and ask for your support,” Noda told DPJ lawmakers in Tokyo. “Let’s brace ourselves and work to achieve stable, reliable government.”

Noda’s win augurs higher taxes in the world’s third-largest economy after he advocated an increase in levies to help pay for reconstruction from the March earthquake and nuclear disaster. He told reporters after his victory that “there are issues of timing” in deciding which taxes to increase, adding he will wait for a government panel to release its recommendations.

Along with inheriting an economy that’s shrunk for three straight quarters, Noda faces the challenge of rebuilding support for a party that has seen its poll ratings eroded by political infighting amid the nation’s deepest postwar crisis.

“Noda is the most aggressive about tax increases among the candidates, so his win would fuel expectations that fiscal reforms will progress,” said Kenichi Kawasaki, senior political analyst at Nomura Securities Co. in Tokyo. “That would be supportive to the bond market.”

Bonds Keep Gains

Japanese bonds retained gains after the vote. Ten-year bond yields fell two basis points to 1.015 percent at 3:05 p.m. in Tokyo. Stocks rose, with the benchmark Nikkei 225 (NKY) Stock Average adding 0.6 percent. The yen was unchanged at 76.67 per dollar.

The selection comes less than a week after Moody’s Investors Service cut Japan’s credit rating one step to Aa3, citing political instability and “weak” prospects for economic growth that will make it difficult for the government to contain the world’s largest public debt burden.

Noda said in a leadership-candidate debate yesterday in Tokyo that the DPJ had let the country down, and called for honoring Kan’s proposal to raise taxes to pay for reconstruction and shore up the welfare system. He said on Aug. 13 that there should be no retreat from a pledge to double the sales tax to 10 percent by the middle of the decade.

The government plans to spend 19 trillion yen ($248 billion) over the next five years to rebuild from the earthquake and tsunami that left 20,000 people dead or missing and devastated the country’s northeast. Included in the total is 6 trillion yen from two supplementary budgets enacted under Kan.

Currency Intervention

Policy makers have also faced a strengthening exchange rate that’s given companies an incentive to shift jobs and production overseas. Noda has overseen three interventions in the currency market in the past year to address the appreciation in the yen. The currency has gained about 19 percent against the dollar since Kan took office in June last year, and reached a postwar record of 75.95 on Aug. 19.

Noda will have to restore public faith in a party that hasn’t lived up to campaign pledges to address the challenges of an aging society, having scaled back subsidies for childcare and failed to overhaul welfare spending. He has signaled he would seek to form a coalition with opposition parties if he became the next prime minister. Kan failed in a similar attempt after the March 11 catastrophe.

The DPJ’s support was at 21 percent, according to a Yomiuri newspaper poll published today. The opposition Liberal Democratic Party, which governed for half a century before being ousted by the Democrats in 2009, got 23 percent, while 46 percent of the public supported no party.

‘At a Cliff’

“As to whether the public feels the government change two years ago was good or bad, we’re standing at a cliff,” Noda said. “That’s why we must work for party unity.”

Kan, 64, announced his resignation last week, hurt by public discontent with his handling of the temblor and the nuclear meltdown that followed it at the Fukushima Dai-Ichi power plant.

Noda was supported by party Secretary-General Katsuya Okada and policy chief Koichiro Gemba.

A fan of combat sports including boxing and wrestling, Noda has been finance minister since June 2010. Before then, he served as deputy finance minister from September 2009 when the DPJ took office.

Noda, a lawmaker serving his fifth term in the more powerful lower house chamber of parliament, is a native of Chiba prefecture to the east of Tokyo and a graduate in political economy from Tokyo’s Waseda University.

To contact the reporters on this story: Sachiko Sakamaki in Tokyo at ssakamaki1@bloomberg.net; Keiko Ujikane in Tokyo at kujikane@bloomberg.net

To contact the editor responsible for this story: Peter Hirschberg at phirschberg@bloomberg.net