Japan needs robust finance industry -new FSA boss

* New FSA boss says finance industry must be stronger

* Says will work to improve Tokyo as global financial centre

* Says no decision on extending short-selling freeze

By David Dolan

TOKYO, July 14 (Reuters) - Japan needs a more robust financial services industry to help boost the world's second-largest economy, the new head of the financial regulator said on Tuesday.

Katsunori Mikuniya, a 58-year-old veteran bureaucrat with a reputation for expertise in capital markets, also said he would work to improve Tokyo's standing as a global financial centre.

"The population is set to age and shrink further," Mikuniya said at his first news conference as commissioner of the Financial Services Agency (FSA).

"A virtuous circle needs to be in place between the role of the financial sector in supporting the real economy and finance as a viable industry."

Mikuniya, previously head of the FSA's supervisory division, replaces Takafumi Sato, who served in the position for two years.

He takes the helm of the regulator as Japanese financial firms grapple with a sliding domestic economy and hefty losses.

Japan's top three banks lost a total of 1.2 trillion yen in the year to March, hit by rising bad loan costs and a sharp fall in their stock portfolios.

"The economy is in bad shape right now and the markets may not recover unless someone carries out reform," said Seishi Ikeda, a lawyer specialising in capital markets at Baker & McKenzie in Tokyo. "I would expect Mr. Mikuniya to work on steps that would help invigorate the markets."

TOKYO CALLING

The FSA is also desperate to improve Tokyo's position as a financial centre, which has been overshadowed in recent years by Hong Kong and Singapore, which boast lower taxes and lighter regulation.

As of 2005, financial services made up just 7 percent of Japan's economy, compared with more than 12 percent in Hong Kong and more than 10 percent in Singapore, according to FSA data.

Under Sato's watch, the FSA rolled out a plan to win back foreign firms by removing the firewalls between banks and brokerages, rejigging tax laws for foreign funds and allowing a market for professional investors.

The Oxford-educated Sato also gave frequent interviews to the foreign media and regularly addressed foreign bankers in the hopes of improving Japan's image in global finance.

It is unclear whether or not Mikuniya will be as foreigner friendly, although he is said to have a strong background in capital markets. In a 2006 interview with the Nikkei daily, he stressed the need for flexibility in applying rules.

Western banks are increasingly trimming their Tokyo operations. HSBC, (HSBA.L) (0005.HK) Europe's largest bank, in April shut its Japanese equity research and trading businesses as part of a global staff reduction.

Separately, Kyodo News said the FSA had decided to extend a temporary freeze on short-selling. Mikuniya told the news conference that nothing had been decided. (Additional reporting by Nathan Layne; editing by Karen Foster)