TOKYO, Japan (Reuters) -- Japan has enacted laws to privatize the postal system, including the world's biggest savings bank, a reform that Prime Minister Junichiro Koizumi has long advocated as a vital step to streamline the economy.

Parliament's upper house, whose rejection of the bills in August triggered a general election that the ruling camp won by a landslide, approved the legislation by a vote of 134 to 100 following adoption by the more powerful lower chamber on Tuesday.

Privatizing the postal system has been the cornerstone of Koizumi's agenda to wean the long-ruling Liberal Democratic Party (LDP) from its addiction to the wasteful public spending that had won votes but bred scandals and inflated government debt.

The big election win by the LDP and its junior coalition partner in the September 11 lower house poll -- cast by Koizumi as a referendum on postal privatization -- convinced most ruling party members of the upper house who had previously opposed the bills to vote in favor of the legislation this time.

"It's a huge political success" for Koizumi, said Robert Feldman, chief economist for Japan at U.S. investment bank Morgan Stanley.

"It also changes the shape of politics by demonstrating that a guy with public support can get things done."

Some analysts wonder whether Koizumi, who has pushed for postal privatization for most of this three decades in politics, will show the same dedication in tackling fresh reforms.

But Feldman said the prime minister was still keen to forge ahead on medical care and other matters.

"There will be no postpartum depression," he said.

Under the postal laws, Japan Post, which has 25,000 post offices and some $3 trillion in assets, will be split into four entities under a new holding company and privatized in 2007.

The holding company will sell off the postal savings and life insurance businesses by 2017.

Possible successors

High on Koizumi's small-government agenda are reform of a medical care system burdened by an ageing population and red tape, merging or privatizing state-run banks that have funneled postal savings funds to money-losing projects and kept nonviable companies on life support, and plans to give local governments more control over both revenues and decision making.

"Health-care reform is a huge issue. It's also a huge battle," said Jesper Koll, chief economist at Merrill Lynch in Tokyo. "There are big vested interests that are just as bad as contractors and postal lobbyists."

Koizumi also needs to attend to ties with Asian neighbors China and South Korea, frayed by a range of issues including the prime minister's annual visits to Tokyo's Yasukuni Shrine for war dead, where World War Two war criminals are also honored.

Attention is already turning to a cabinet reshuffle expected early next month, since Koizumi has made clear he intends to give potential successors key portfolios in order to show their stuff.

"He's said he will appoint possible successors and let them compete over who is the best reformer," Feldman said.

LDP party executive Shinzo Abe, 51, a political blue-blood known for his hawkish security views and a tough stance toward China, tops the list of surveys when voters are asked whom they would like to see as prime minister.

Other names floated include former Chief Cabinet Secretary Yasuo Fukuda, 69, a political veteran whose late father was prime minister, and Finance Minister Sadakazu Tanigaki, 60.

Environment Minister Yuriko Koike, 53, a former TV anchor, has been mentioned as a possibility to become Japan's first female prime minister, while talk is simmering that Economics Minister Heizo Takenaka, 54 -- a former academic and the architect of many of Koizumi's economic reforms -- could be a dark horse candidate.