* Abe to pick nominee this week, seek opposition support
* ADB's Kuroda, Ex-BOJ governor Iwata strong candidates
* Ex-finance bureaucrat Muto still in short-list for job
* ADB Kuroda leading candidate for next BOJ head - Asahi
By Leika Kihara
TOKYO, Feb 24 (Reuters) - Former top bureaucrat Toshiro Muto is losing some momentum in the race to become Japan's next central bank governor, making for a more open contest, which will kick off in full force this week following Prime Minister Shinzo Abe's return from his U.S. trip.
Muto had been considered the leading candidate to replace incumbent Masaaki Shirakawa, who leaves on March 19 after a five-year term. Muto remains on the short list with strong backing from bureaucrats at the powerful Ministry of Finance.
But evidence is building that the race may be closer than previously thought between Muto, Asian Development Bank President Haruhiko Kuroda and former deputy governor Kazumasa Iwata, say officials and lawmakers familiar with the selection process.
Abe, who won a resounding election victory in December promising to finally rid Japan of nearly 20 years of deflation, wants a fresh face in the job, someone more eager to experiment with radical measures, the sources said.
"Muto is preferred by finance ministry bureaucrats, while people close to Abe want someone else," said one of the sources, who spoke on condition of anonymity due to the sensitivity of the matter.
"How markets may react is also important," the source said, adding that Abe may want to avoid disappointing markets already pricing in a radical makeover of monetary policy under a new Bank of Japan (BOJ) leadership. His policy prescription, dubbed "Abenomics", has pushed the yen to its lowest level in more than three years.
Tokyo share prices fell briefly after Reuters reported on Feb. 15 that Muto was leading the BOJ race, as investors saw him as a policymaker who would be more aggressive with policy than the outgoing Skirakawa, but who would also refrain from the more unorthodox steps advocated by some candidates.
Finance Minister Taro Aso told reporters on Friday the new BOJ governor does not necessarily have to be someone from his ministry, leaving room to support candidates besides Muto if Abe insists on someone more radical.
Abe hardened his comments last week on the need for a new governor to have international contacts as a key qualification for the post, suggesting that he prefers someone with experience in financial diplomacy. Muto spent most of his career in domestic affairs, rising up the career ladder at the ministry of finance to become its top bureaucrat.
"Japan now needs a governor who can join, communicate and convince people in the inner circles of global finance," Abe told parliament on Wednesday.
That would put ADB's Kuroda, who was Japan's top currency diplomat in the midst of the Asian financial crisis in the late 1990s, at the top of the list. As president of the 67-member ADB, which includes countries from outside of Asia, he rubs shoulders with policymakers the world over.
Kuroda is now leading the race to become nominated by the government as next BOJ governor, the major Japanese daily Asahi newspaper reported on Saturday, quoting finance ministry and senior government officials.
Indeed, Kuroda ticks many other qualifications suggested by Abe's cabinet ministers and opposition parties, such as experience managing a large organisation, strong English skills and the sharing of Abe's calls for bolder monetary stimulus.
Kazumasa Iwata, a former deputy BOJ governor, also remains a strong candidate thanks to his fluent English, academic work on economic policy known at home and abroad, and his consistent calls for more aggressive bond buying by the central bank.
But both of them face road-blocks in getting chosen. Kuroda would have to cut short his job at the ADB, which could weaken Japan's standing as the country that traditionally provides the head of the organisation established in 1966.
Should Iwata get the top job, his repeated calls for the BOJ to create a fund to buy foreign bonds could raise suspicions among Japan's Group of Seven peers that Tokyo is targetting the yen with monetary policy.
More radical candidates from the academia like Kikuo Iwata and Takatoshi Ito, while favoured by Abe and his aides, may have less of a chance because they lack experience managing a big organisation -- a prerequisite set by Aso, the sources said.
The selection process for the top BOJ posts -- that of the governor and two deputy governors -- will start in full force later on Sunday upon Abe's return from the United States.
"The choice will have a huge impact on the current market trend of yen weakness and share price gains. It will be made based mainly on whether the person will pursue bold monetary policy that the premier is seeking," Japan's top government spokesman Yoshihide Suga told a television programme on Sunday.
Delicate political maneuvering is still needed to ensure parliamentary approval and may mean that Abe has to settle for someone who is not his first choice.
The prime minister is keen to avoid a rerun of the debacle in 2008 when the seat for the BOJ governor was left open for weeks because the main opposition Democratic Party of Japan (DPJ) blocked the nomination of several candidates, including Muto, in the upper house.
Support from opposition parties is vital again as Abe's ruling Liberal Democratic Party lacks a majority in the upper house. The chance of Muto getting the job heightens if Abe can garner support from the biggest opposition Democratic Party of Japan, which has signalled it would not rule out ex-bureaucrats.
But other candidates will have a better chance if Abe must rely on support from fringe parties like Your Party, which is opposed to ex-bureaucrats and want the governor to be a fluent English speaker, which Muto is not.
"Abe may have already chosen his top candidate, but nobody really knows what's on his mind. Everything will start rolling once he's back from the United States," said another source.