The ruling Liberal Democratic Party and the Japan Innovation Party have agreed to form a coalition government, setting the stage for the country's first woman prime minister, Kyodo news agency reported on Sunday.
Sanae Takaichi, leader of the conservative LDP, and Hirofumi Yoshimura, head of the smaller right-leaning group known as Ishin, are set to sign an agreement sealing their alliance on Monday, Kyodo said.
Ishin's co-head, Fumitake Fujita, had raised expectations for a deal on Friday, saying the two parties had made "big progress" in coalition talks.
Ishin lawmakers will vote for Ms Takaichi in an election to choose the prime minister in parliament on Tuesday, but does not intend to send ministers to her cabinet, initially at least.
That would fall short of the full-fledged alliance the LDP maintained with the Komeito party until the junior partner quit the coalition this month, sparking concerns over the stability of the forthcoming government.
Mr Fujita told reporters on Sunday evening negotiations were in the final stages and his fellow lawmakers entrusted Mr Yoshimura and himself to make a final decision.
He said their decision would be announced on Monday, but declined to go into details.
"I don't know how the picture we’ll paint tomorrow will be evaluated but I think we’re heading into tomorrow while the relationship of trust is deepening substantially and I believe that's what the other party is thinking," Mr Fujita said.
Ms Takaichi's path to succeed prime minister Shigeru Ishiba had seemed all but certain after she won the presidency of the long-ruling LDP early this month. But Komeito quit the 26-year coalition with the LDP, setting off a flurry of negotiations with rival parties to select the next premier.
In an effort to get Ishin on board, the LDP offered to keep working towards banning donations from companies and other organisations, and exempting food items from Japan's sales tax, Kyodo said.
Ishin has proposed eliminating the tax on food items for two years.
Ms Takaichi, a fiscal dove, has called for higher spending and tax cuts to cushion consumers from rising inflation and has criticised the Bank of Japan's decision to raise interest rates.
She favours revising Japan's pacifist constitution to recognise the role of its expanding military.
Ms Takaichi is a regular visitor to the Yasukuni shrine for Japan's war dead - including some executed war criminals - which is viewed by some Asian neighbours as a symbol of the nation's past militarism.
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