Japan's ruling party picked conservative nationalist Sanae Takaichi as its head on Saturday, putting her on course to become the country's first female prime minister in a move set to jolt investors and neighbours.

The Liberal Democratic Party, which has ruled Japan for almost all of the postwar era, elected Takaichi, 64, to regain trust from a public angered by rising prices and drawn to opposition groups promising stimulus and clampdowns on migrants.

A vote in parliament to choose a replacement for outgoing Shigeru Ishiba is expected to be held on October 15. Takaichi is favoured as the ruling coalition has the largest number of seats.

Inherits party in crisis

Takaichi, the only woman among the five LDP candidates, beat a challenge from the more moderate Shinjiro Koizumi, 44, who was bidding to become the youngest modern leader.

A former economic security and internal affairs minister with an expansionary fiscal agenda for the world's fourth-largest economy, Takaichi takes over a party in crisis.

Various other parties, including the expansionist Democratic Party for the People and the anti-immigration Sanseito, have been steadily luring voters, especially younger ones, away from the LDP.

The LDP and its coalition partner lost their majorities in both houses under Ishiba over the past year, triggering his resignation.

"Recently, I have heard harsh voices from across the country saying we don’t know what the LDP stands for anymore," Takaichi said in a speech before the second-round vote. "That sense of urgency drove me. I wanted to turn people’s anxieties about their daily lives and the future into hope."

Takaichi, who says her hero is Margaret Thatcher, Britain's first female prime minister, offers a starker vision for change than Koizumi and is potentially more disruptive.

An advocate of late premier Shinzo Abe's "Abenomics" strategy to boost the economy with aggressive spending and easy monetary policy, she has previously criticised the Bank of Japan's interest rate increases.

Such a spending shift could spook investors worried about one of the world's biggest debt loads.

Naoya Hasegawa, chief bond strategist at Okasan Securities in Tokyo, said Takaichi's election had weakened the chances of the BOJ raising rates this month, which markets had priced at around a 60% chance before the vote.

Discussed redoing Trump trade deal

Takaichi has also raised the possibility of redoing an investment deal with US President Donald Trump that lowered his punishing tariffs in return for Japanese taxpayer-backed investment.

The US ambassador to Japan, George Glass, congratulated Takaichi, posting on X that he looked forward to strengthening the Japan-US partnership "on every front".

But her nationalistic positions - such as her regular visits to the Yasukuni shrine to Japan's war dead, viewed by some Asian countries as a symbol of its past militarism - may rile neighbours like South Korea and China.

She favours revising Japan's pacifist postwar constitution and suggested this year that Japan could form a "quasi-security alliance" with Taiwan, the democratically governed island claimed by China.

Taiwan President Lai Ching-te welcomed her election, saying she was a "steadfast friend of Taiwan".

"It is hoped that under the leadership of the new (LDP) President Takaichi, Taiwan and Japan can deepen their partnership in areas such as economic trade, security, and technological cooperation," he said in a statement.

If elected prime minister, Takaichi said she would travel overseas more regularly than her predecessor to spread the word that "Japan is Back!"

"I have thrown away my own work-life balance and I will work, work, work," Takaichi said in her victory speech.