TOKYO - 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 chronic deflation by setting a 2-percent target of inflation. ?

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.