TOKYO (Reuters) - Japan’s prime minister has vowed to make education and childcare a priority over balancing the budget after winning a new mandate from voters on Sunday, as a rapidly-ageing population threatens to undermine his efforts to reflate the economy.

Japan's Prime Minister Shinzo Abe, leader of the Liberal Democratic Party (LDP), smiles during a news conference after Japan’s lower house election, at the LDP headquarters in Tokyo, Japan October 22, 2017. REUTERS/Isse Kato - RC19EC7CAA10

Prime Minister Shinzo Abe’s ruling coalition scored a landslide victory at the polls, boosted by his campaign promises to invest more heavily on education and childcare, aimed partly at encouraging more women to join the workforce.

Abe also made clear he would continue to press cautious Japanese firms to spend their record cash piles on boosting employees’ wages to stoke a virtuous growth cycle.

With his “Abenomics” recipe centered on hyper-easy monetary policy likely to continue, Abe’s solid election win also raised expectations he would reappoint Bank of Japan Governor Haruhiko Kuroda in early April when his five-year term expires.

Abe's election victory lifted world stocks and the dollar on Monday, sending Japan's Nikkei share average .N225 to 21-year highs. The index ended up 1.1 percent at 21,696.65, up for a record 15th straight session.

Abe swept to power in late 2012, pledging to pull Japan’s economy, the world’s third largest, out of nearly two decades of deflation and stagnation. The economy is recovering gradually but sluggish wage growth keeps consumer spending and inflation from accelerating, while corporations face labor shortages due to a low birth rate and fast-ageing population.

The premier promised to offer free pre-school for all children aged three to five and for children aged two or below from low-income households.

“The key to Japan’s sustainable growth is how we respond to ageing of the population, which is the biggest challenge for Abenomics,” Abe told a news conference.

“We aim to exit deflation by accelerating wage growth through innovation on productivity.”

If free pre-school education is applied to all children now, it would cost 1.2 trillion yen ($10.54 billion), government estimates show.

SMBC Nikko Securities estimates that free pre-school education would relieve households of a financial burden of around 1 trillion yen. If half the reduced cost is spent on consumption, that would push up real gross domestic product by 0.1 percent, the securities firm said.

Furthermore, Abe has vowed to expand education benefits with the aim of offering free higher education for low-income households.

BALANCING BUDGET

Abe said he would go ahead with a planned sales tax hike to 10 percent from 8 percent in 2019 and use some of the revenue to create a “social security system for all generations”, by diverting the funds to education instead of paying down public debt.

The premier had earlier admitted that would make it “impossible” to meet the pledge to balance the primary budget -- excluding debt-servicing and new bond sales -- by the year ending March 2021.

While Abe’s plan to spend more on education and childcare has helped buoy stocks of some related companies such as JP-Holdings Inc that operates nursery schools, the specter of bigger spending raises concerns about looser fiscal discipline.

Fiscal reform is a matter of urgency. Japan’s public debt tops twice the size of its $5 trillion economy, making it the industrial world’s heaviest debt burden.

Nonetheless, Abe, who prioritizes growth, has pushed back the primary budget-balancing target without setting a new goal yet, while vowing to compile by the year-end an extra spending plan worth around 2 trillion for human capital investment.

“Simply boosting benefits for all generations means politically putting off the pain to future generations, which can be criticized as pork-barrel spending,” said Yasuhide Yajima, chief economist at NLI Research Institute.

“Diverting sales tax revenue could open the door to expanding fiscal spending further. In order to prevent fiscal discipline from slipping, Japan must continue efforts needed to restore public finances.”