Shizuoka District Court decided to "start the retrial over the case" of Iwao Hakamada, 78, who was convicted for the grisly murder of his boss and the man's family, a court official said.
Delivering his ruling, presiding judge Hiroaki Murayama cited possible planting of evidence by investigators to win a conviction as they sought to bring closure to a crime that shocked the country.
"There is possibility that (key pieces of) evidence have been fabricated by investigative bodies," Murayama said in his decision, according to Jiji Press.
Apart from the United States, Japan is the only major industrialised democracy to carry out capital punishment, a practise that has led to repeated protests from European governments and human rights groups.
Hakamada is the sixth person since the end of World War II to receive a retrial after having a death sentence confirmed, and his case will bolster opponents of capital punishment, including rights group Amnesty, which has just launched its annual report on the practise.
Shizuoka prosecutors told Japanese media that they are undecided on whether to appeal the decision, according to national broadcaster NHK.
But the former boxer, who worked for a bean paste maker, later confessed following what he subsequently claimed was a brutal police interrogation that included beatings.
He retracted his confession, but to no avail, and the supreme court confirmed his death sentence in 1980.
Prosecutors and courts had used blood-stained clothes, which emerged a year after the crime and his arrest, as key evidence to convict Hakamada.
The clothes did not fit him, his supporters said. The blood stains appeared too vivid for evidence that was discovered a year after the crime. Later DNA tests found no link between Hakamada, the clothes and the blood stains, his supporters said.
His supporters and some lawyers, including the Japan Federation of Bar Associations, have loudly voiced their doubts about evidence, the police investigations and the judicial logic that led to the conviction.
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