Japan's Liberal Democratic Party ( LDP) and its key ally, the New Komeito Party, have formally agreed on Tuesday to form a coalition government, Japan's Kyodo News Agency reported.

The agreement was signed by LDP leader Shinzo Abe and his New Komeito counterpart Natsuo Yamaguchi during their talks in the afternoon.

The two allies also signed a policy coordination document and agreed to fight the country's long-lasting deflation by setting a 2-percent inflation target and adopting more quantitative easing policy.

The two parties also agreed to push forward approvals of a supplementary budget bill for the 2012 fiscal year and a budget bill for the 2013 fiscal year in the Diet so as to revitalize Japan's stagnant economy.

As for energy policy, the two allies agreed to reduce the country's dependence on nuclear power gradually.

Abe is expected to become the country's new prime minister at a special session of the Diet tomorrow and he will immediately form his cabinet.