FACTBOX- Policy challenges facing Japan's next government

By Yoko Nishikawa

(Reuters) - The winner of an election that Japan's Prime Minister Taro Aso is set to call for August 30 will face a raft of challenges including the country's worst recession in 60 years and growing social welfare costs in a fast-ageing society.

The cabinet signed off on Aso's plan to dissolve parliament's lower house on Tuesday. The main opposition Democratic Party has its best ever chance of beating Aso's ruling Liberal Democratic Party and its junior coalition partner in the poll, ending half a century of nearly unbroken rule by the conservative LDP.

Following are major challenges for a new government.

ECONOMY

Japan's economy is mired in its worst recession since World War Two and has edged back into deflation, although recently there have been signs of a tentative recovery.

Aso's government has planned 27 trillion yen ($282 billion) in stimulus spending since the global financial crisis erupted last year. The Democrats have said the government is spending money on the wrong things, such as a museum of Japanese pop culture.

But stimulus efforts from past economic problems have left a mountain of public debt equivalent to around 170 percent of GDP, the highest among advanced nations, constraining Tokyo's ability to spend its way out of recession and worrying financial markets about further debt issuance.

The Bank of Japan, with its key policy rate near zero percent, has just voted to extend a series of steps, including buying corporate debt and increased buying of government bonds, to keep funding strains from further derailing the economy.