UPDATE 2-Muto leads as Japan PM close to choosing nominee for BOJ chief

Fri Feb 15, 2013 2:43am EST

* Abe likely to choose nominee in next few days-sources
    * Academics ruled out, list down to 2-3 names - sources
    * Choice of Muto means BOJ will shy away from radical steps
    * Need for parliament approval complicates process


    By Leika Kihara and Yoshifumi Takemoto
    TOKYO, Feb 15 (Reuters) - Former top financial bureaucrat
Toshiro Muto is leading the field of candidates to become
Japan's next central bank governor as Prime Minister Shinzo Abe
closes in on picking a nominee, sources close to the process
told Reuters.
    The choice of Muto, 69, would suggest the Bank of Japan will
intensify stimulus efforts to reflate the economy, which has
struggled with deflation for years, but refrain from the more
radical measures advocated by other candidates.
    Some policymakers and government officials worry radical
measures could unsettle markets and risk increasing tensions
with Group of 20 nations. A sharp yen decline since Abe started
pushing for bold BOJ measures has already sparked criticism of
Japan's policies ahead of a G20 meeting starting Friday.
    "The choice of Muto appears to be gaining momentum," said 
one of the sources familiar with the selection process. Still,
Muto's selection is not a done deal given the political
maneuvering needed to ensure parliamentary approval.
    Abe and his advisers have cut the field of final candidates
to two or three and have excluded academic and private-sector
economists in favour of those with bureaucratic experience.
    The premier is expected to reach a final decision in the
next few days, said several people familiar with the process.
They declined to be identified because the decision is still
pending and discussions remain private.
    Muto has long been considered a leading candidate to replace
Masaaki Shirakawa, 63, who steps down with his two deputies on
March 19.
    He has close ties with ruling party lawmakers and past
experience steering fiscal and monetary policies, having moved
up the ranks of the powerful finance ministry and serving as
deputy BOJ governor between 2003 and 2008.
    Japan's Nikkei stock average fell and the yen rose
 on the report as investors scaled back expectations of
aggressive monetary easing given Muto's relatively more moderate
views compared with other candidates.
    "Muto is considered as someone who would only follow the
traditional approach such as expanding the BOJ's asset buying
programme. It would merely be an 'enhanced' version of the
conventional approach," said Norihiro Fujito, senior investment
strategist at Mitsubishi UFJ Morgan Stanley Securities.
    "We cannot picture Muto going bold like buying foreign
funds, a move that could accelerate yen declines."
 
    Abe, who led his party back to power in December with
promises of aggressive monetary and fiscal stimulus, has said he
wanted the new BOJ governor to pursue bold monetary easing.
    That gave rise to the view he may choose dark-horse
candidates from academia who have advocated unorthodox policy
measures, such as economics professor Kikuo Iwata. It also
pushed the yen lower and boosted the stock market on the
prospects for exporters to benefit from the weaker currency.
    But many within Abe's ruling party, including Finance
Minister Taro Aso, feel that the top BOJ job should go to
someone with strong management and negotiation skills.
    The prime minister's short-list includes Asian Development
Bank head Haruhiko Kuroda, Japan's former currency tsar, and
Kazumasa Iwata, a former government economist who served as
deputy BOJ governor alongside Muto.
    Under Shirakawa's leadership, the central bank has cut
interest rates almost to zero and adopted policies that inject
cash into the economy. But he has been criticised as having a
cautious and gradualistic approach to stimulus.
    After intense pressure from Abe, the central bank agreed
last month to its boldest measures yet. It doubled its inflation
target to 2 percent and promised to adopt "open ended" asset
buying from next year to achieve it.

    OPPOSITION SUPPORT KEY
    Abe will need the approval of both houses of parliament for
his nomination. His Liberal Democratic Party (LDP) lacks a
majority in the upper house, so needs the cooperation of
opposition parties.
    The biggest opposition party, the Democratic Party of Japan
(DPJ), has indicated it would support a former bureaucrat like
Muto, but has given the LDP no assurances it will cooperate.
Some fringe parties, on the other hand, have opposed the idea of
selecting a former financial bureaucrat.
    Muto has said the BOJ has room to boost government bond
purchases to pump more money into the economy. But he has also
warned that printing money to finance public debt could backfire
and trigger a sharp bond yield spike, suggesting that he will
take a more cautious approach than other candidates.
    Muto has also played down the idea advocated by some
lawmakers that the central bank should buy foreign bonds to curb
the strength of the yen.
    Currently chairman of private think-tank Daiwa Institute of
Research, Muto was the Ministry of Finance's top bureaucrat. He
was nominated to head the BOJ by the LDP in 2008, but his
candidacy was struck down due to opposition by the DPJ.
    Abe's push for more aggressive BOJ action has driven the yen
to three-year lows and pushed the stock market to its highest
levels since late 2008.
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