Japan power broker acquitted in scandal

* Ex-Democrat leader acquitted in political funding trial

* Ozawa leads biggest intra party faction, opposes tax plan

* Acquittal could spell more infighting, policy delays

TOKYO - A Japanese court on Thursday acquitted ruling party heavyweight Ichiro Ozawa of charges of violating fund-raising law, further complicating Prime Minister Yoshihiko Noda's task of preserving party unity and pushing through his contentious tax hike plan.

The Tokyo district court decision could help the 69-year old former Democratic party leader, who opposes Noda's plan to double the sales tax and leads the party's biggest faction, contest the scheme and challenge Noda's leadership.

All major TV channels broke into their regular programmes with the news on the verdict in the trial of the veteran politician who like no other has divided the Japanese public for much of his four-decade career.

Dozens of Ozawa supporters cheered outside the courthouse, carrying placards with his picture on one side and "Innocent" on the other.

Analysts say the threat of an early election may prevent Ozawa's backers from revolting against the prime minister, and that the fate of the tax bill rested primarily in the hands of the opposition which controls the parliament's upper house.  

Markets showed little reaction to the verdict, but bond investors will be watching Ozawa's next steps for any signs that infighting among the ruling Democrats could further delay budget reforms needed to contain Japan's snowballing debt.

"This could encourage some members of Ozawa group to be more vocal in their opposition to sales tax hikes, but it will be difficult for them to immediately derail this proposal," said Shuji Tonouchi, senior fixed income strategist at Mitsubishi UFJ Morgan Stanley Securities in Tokyo.

"Still, there are concerns that debate over the sales tax could be delayed. This is a concern for Japan's fiscal policy."

Throughout the six-month trial Ozawa has denied wrongdoing and prosecutors had originally decided not to charge him due to lack of evidence.

But a judicial panel of ordinary citizens ruled that he must face the charges, prompting his indictment in January 2011 under a system introduced as part of a 2009 judicial reform.

However, many observers had anticipated an acquittal given that the prosecution, which had sought a three year prison sentence, built its case largely on circumstantial evidence.

The acquittal comes as a welcome break for Japan's most controversial politician whose mastery of backroom deals earned him nicknames of "Prince of Darkness" and "Shadow Shogun," but who has suffered a series of setbacks in the past few years.  

The man credited by many for orchestrating the Democrats' historic victory in a 2009 election lost a party leadership race in 2010 to then-prime minister Naoto Kan and in June failed to oust Kan in a no-confidence vote. Last year, a candidate backed by Ozawa to succeed Kan was defeated by Noda.

"Talk about a cat has nine lives. I don't know how many lives Ozawa has, but ever since 1990, he has been creating new parties, failing, creating another one, coming back so forth and so on," Gerald Curtis, Columbia University professor and author of several books on Japanese politics, said ahead of the verdict.  

"So he is not completely finished yet, but I think his leadership role is over."

Still, Ozawa backers, who by some counts make up a third of the ruling party's lower house lawmakers, see his gift for challenging the status quo is just what Japan needs to snap out of its prolonged stagnation. How many of them, however, would join him in voting against sales tax hikes is unclear.

Noda has staked his political career on the plan, seen as a crucial first step albeit insufficient toward reining in Japan's public debt, already twice the size of its $5 trillion economy.