Japanese Prime Minister Junichiro Koizumi, one day after an election setback, is vowing to continue his economic reforms and keep Japan's troops in Iraq. But the outcome of Sunday's parliamentary election could mean the prime minister will have a tougher time achieving his goals.

A defiant Prime Minister Junichiro Koizumi told reporters on Monday that the Upper House election setback suffered by his Liberal Democratic Party a day earlier would not cause him to shift course.

The big gains for the opposition Democratic Party are being interpreted as voter anger about pension cuts and Japan's troop deployment to Iraq.

Mr. Koizumi vowed he would not bow to an opposition demand to pull Japanese soldiers from Iraq, who are there to provide relief and reconstruction. He says the non-combat troops are needed to assist the war-torn country after the transfer of power from the U.S. occupation.

The LDP won 49 seats in Sunday's Upper House election, two seats short of its stated goal. But its coalition partner, the New Komei Party, backed by the Buddhist sect Soka Gakkai, gained one seat, leaving their combined strength in the House of Councilors unchanged.

The opposition Democratic Party was declared the big winner in Sunday's election. It had 38 seats at stake in the Upper House, but won 50.

The party's president, Katsuya Okada, on Monday called the results a step towards grabbing power from the LDP An unsmiling Mr. Okada, meeting reporters in front of his residence, says the Democratic Party still has a way to go to achieve its goal of being able to name the prime minister.

As a result of Sunday's mandate from voters, he is demanding that dispatching Japanese troops to Iraq be debated by parliament.

Japanese media say the governing coalition agreed to that demand on Monday, and a five-day ad hoc parliamentary session will begin July 30 to discuss Japanese participation in Iraq.

Mr. Koizumi's job was not at stake directly in this election, because the Lower House selects the prime minister. The prime minister says he intends to stay in office until the autumn of 2006.

Despite the setback for the governing coalition

Sunday, investors on Monday were relieved by the election results. The broad-based TOPIX index of the Tokyo Stock Market climbed to its highest level in three weeks. And the yen rose against the dollar to its highest point since June 28.

Analysts say that although the results might weaken Mr. Koizumi's ability to achieve reforms in the long term, the results mean short-term political stability.