Ichiro Ozawa was once dubbed the "Shadow Shogun"
One of the most powerful men in Japanese politics was found not guilty Thursday of a major funding scandal, paving the way for a possible showdown with the ruling party leadership.
Ichiro Ozawa, 69, once dubbed the "Shadow Shogun", was cleared by the Tokyo District Court of allegations he conspired with aides to hide 400 million yen ($4.9 million) he lent to his political funding body in 2004 for a land deal.
His aides had said the mistake was purely technical and their boss -- a former Democratic Party of Japan (DPJ) leader who engineered the party's 2009 election victory -- had not been aware of it.
Prosecutors, who came unstuck over the use of illegal evidence, said it was "unthinkable" Ozawa had not been in the loop.
Major TV networks cleared their schedules to report the verdict, with a huge media presence at the court for a case that has gripped Japan's political classes for years.
A spokesman for the court said 1,843 people queued up for the 46 seats available to the public.
According to NHK, presiding Judge Fumio Daizen told the court: "It has been decided that he is innocent because there is no evidence proving his conspiracy."
In a brief statement welcoming the verdict, Ozawa said: "I pay my respects to the court for showing its common sense and fairness, and I am grateful for people who have supported me."
Ozawa is the head of the largest grouping in the DPJ, and often seen as the power behind the premiership. In the highly factionalised world of Japanese politics, very little gets done without his say-so, tacit or otherwise.
While a conviction and the ensuing incarceration would almost certainly have sunk him, Thursday's verdict clears the way for Ozawa to confront Prime Minister Yoshihiko Noda over controversial plans to double sales tax by 2015.
Years of unsuccessful pump-priming aimed at kickstarting Japan's moribund economy have left it with debts equivalent to twice its GDP.
Mainstream media, academics and international organisations say the hike is a sensible -- albeit partial -- solution to the fiscal shortfall.
But Ozawa, whose ability to take the public pulse is begrudgingly admired, has set his faction -- which makes up around a third of the DPJ -- firmly against the move.
Ozawa was likely to "come back with vengeance" to try to push Noda out of power, said Gerald Curtis, Columbia University professor of Japanese politics.
"This has nothing to do with the national interest. This is all about political manoeuvering. National interest falls to the second, third, fourth place in Japanese politics these days," he said.
"Nothing is getting done in the parliament."
Koichi Nakano, political science professor at Sophia University, said Ozawa's followers are not numerous enough to make him the next party leader, but "he has tremendous annoying power" to make Noda's life difficult.
He could distract from debates on the tax hike and the US-led Trans-Pacific Partnership multilateral free trade deal, Nakano said.
Kenji Yamaoka, a DPJ lawmaker close to Ozawa, ruled out any immediate head-on clash with the party leadership.
"We are not seeking confrontation blindly. We are not thinking about a power struggle in the party," Yamaoka told the private TBS network.
But he noted the Ozawa group was aware of the "promises we made to the people and how we will realise them".
The DPJ swept to power in 2009 with its then leader Yukio Hatoyama promising to slash deficits by cutting spending, instead of raising taxes.
Financial markets ignored Thursday's ruling, despite fears that stocks could tumble and the yen might drop with any perceived increase in uncertainty over Japan's fiscal future.
Makoto Noji, senior currency strategist at SMBC Nikko Securities, said the acquittal did not lessen the need for reform, no matter what Ozawa's next move may be.
"People in the market don't care much (for) the internal political battle," Dow Jones Newswires quoted him as saying.
"Ozawa's assertions that the ruling party should stick to its campaign promise... is no longer realistic," he said.
In late afternoon, the yen stood at 81.15 to the dollar, up from 81.35 in New York.
The Nikkei 225 index at the Tokyo Stock Exchange closed flat at 9,561.83.