By Mariko Katsumura and Chang-Ran Kim
TOKYO (Reuters) -Sanae Takaichi, the newly-elected head of Japan's ruling Liberal Democratic Party, held talks about a possible coalition with leaders of the right-leaning Innovation Party on Thursday, in a bid to clinch a prime ministerial vote expected next week.
The Nikkei share average rose as prospects appeared to brighten for Takaichi to become Japan's first woman premier, stoking bets on a revival in big spending and loose monetary policy.
Takaichi's path to succeed Prime Minister Shigeru Ishiba had seemed all but certain until the LDP's junior partner, Komeito, quit their 26-year coalition last week, setting off a flurry of negotiations with rival parties to select the next premier.
"We've made significant progress in aligning our values," said Fumitake Fujita, co-head of the Innovation Party, following the talks that also included policy chiefs of both parties.
He said the parties would meet again on Friday but cautioned that it was not clear whether they could reach a deal. A final decision would likely be made on Monday, he said.
The LDP's policy chief, Takayuki Kobayashi, said the sides were aligned on key topics including security and energy policies.
Taken together, the two parties would be just two seats short of a majority in the lower house, which has the deciding vote to choose the prime minister, but the government has yet to agree a date.
The Innovation Party's plans include designating a second capital in addition to Tokyo, restarting nuclear power plants and setting limits on the number of foreign residents.
On security, it calls for a more robust defence posture and plans to revise Japan's war-renouncing constitution, aligning with the views of Takaichi, a nationalist from the LDP's right wing.
The main opposition Constitutional Democratic Party has also sought to draw the Innovation Party into a three-way tie-up with the Democratic Party for the People (DPFP), and enable a premiership bid by DPFP leader Yuichiro Tamaki.
However, those talks were inconclusive on Wednesday.
The LDP has proposed October 21 for a parliament vote on parties' choices for the next premier, but the opposition has pushed back, citing coalition discussions.
Any candidate securing a simple majority in the first round of such a vote will win approval. If not, the two with the most votes go into a run-off.
"Although the situation remains fluid, there is a strong 75% probability that Takaichi will be named Japan's next premier," EurAsia Group analysts said in a note, citing the potential tie-up with the Innovation Party.
(Reporting by Mariko Katsumura, Chang-Ran Kim and John Geddie; Editing by Clarence Fernandez and Thomas Derpinghaus.)
