By Leika Kihara TOKYO, Feb 7 (Reuters) - The Japanese prime minister's push for a governor who will lead a radical policy shake up at the Bank of Japan is meeting resistance from his own cabinet and financial bureaucrats, who fear extreme measures from the central bank may trigger a damaging rise in bond yields. That tussle is testing Shinzo Abe's resolve to push through with his pledge for an overhaul of the monetary policies that have so far failed to jump start Japan from years of economic malaise. The delicate political maneuvering needed to ensure parliamentary approval could mean that Abe may have to settle for someone who is not his first choice, officials close to Abe and those involved in the selection process say. "Abe will have the final word. Still, it will be a close call with a lot of complexities involved," said a government official with knowledge of the negotiations. It is virtually a given that whoever takes over in coming weeks as head of the Bank of Japan will pursue monetary easing with more vigour than outgoing governor Masaaki Shirakawa. Having cut interest rates almost to zero, the BOJ has adopted policies that inject cash into the economy. At stake is how far the new BOJ chief will be prepared to push the central bank into untested policy waters in answer Abe's call for an all-out assault to break Japan out of years of grinding deflation and its fourth recession since 2000. BALANCING ACT In the bureaucrats' corner is Toshiro Muto, 69, a former top-level financial official expected to push harder on the gas pedal than Shirakawa but to watch out for potential potholes and speed bumps. He advocates the BOJ buying more longer-dated government bonds and expanding asset purchases more aggressively. But he has also warned that printing money to finance public debt could backfire and trigger a sharp bond yield spike. That could significantly add to Japan's public debt burden, already the highest in the industrialised world at more than twice the size of the economy. For the former top finance ministry bureaucrat and BOJ deputy governor, it is the second chance to land the top job at the central bank. His candidacy was struck down in parliament five years ago, allowing Shirakawa to come in as a compromise candidate. In Abe's corner, there is a small group of hopefuls advocating unorthodox and sometimes controversial steps, such as buying foreign bonds and more risky assets, to help Japan's new leader make good on his pledge to revive the stagnant economy with powerful monetary and fiscal stimulus. Asian Development Bank President Haruhiko Kuroda, 68, is a vocal critic of Shirakawa's BOJ policies and a frontrunner in Abe's camp pushing for a revamp of the central bank's policies. Kuroda ticks most of the boxes on the ruling and opposition parties' wish list. That is important because whoever Abe's government picks will need approval from both houses of parliament, including the upper chamber where Abe's Liberal Democratic Party (LDP) and its small ally lack a majority. Kuroda, who was Japan's top currency diplomat in the wake of the Asian financial crisis in the late 1990s, has management, markets and international expertise. He is a fluent English speaker with a network of global contacts. ABE'S MOMENTUM It is up to Abe and his cabinet to put forward a candidate to replace Shirakawa and his two deputies on the nine person board. That is expected by the end of this month. Abe told parliament on Thursday the new BOJ governor must be able to communicate Tokyo's policy stance to the global community, a sign he may be favouring someone like Kuroda. The headhunting gained momentum on Tuesday after Shirakawa said he would leave on March 19, three weeks before the end of his term, to synchronise his departure with that of his deputies. The news drove the yen down to its lowest level against the dollar since May 2010 as markets brought forward the anticipated timing of more aggressive easing under a new BOJ leadership. The yen's retreat from record highs scaled in the past two years has already offered welcome relief to Japanese exporters and a rally in the Tokyo stock market, which closed on Wednesday at its highest level in more than four years. Shares in Toyota Motor Corp hit a four-year high after the automaker lifted its annual profit guidance, partly because of the weakening yen. Abe is keen to maintain the momentum behind his economic prescription - dubbed "Abenomics" - and appointing an outsider with unorthodox ideas could accomplish that. Kuroda, who calls on the BOJ to buy more risky assets, or academics Kikuo Iwata and Takatoshi Ito, among the BOJ's harshest critics and advocates of a rapid expansion of the central bank's balance sheet, fit the bill. "Abe has said he wants someone who can drive the BOJ into taking unprecedented policy steps. It wouldn't make sense for him to choose an ex-bureaucrat," said another source. IN MUTO'S FAVOUR Still, several factors seem to act in Muto's favour. First, alarmed by the radical views of Abe's favourites, BOJ and Ministry of Finance bureaucrats have set aside their differences and have been lobbying together for someone like Muto, who could be relied on to avoid anything that could jeopardise financial market stability, sources with knowledge of the negotiations said. Secondly, not everyone in Abe's cabinet and the LDP is as hell-bent on shaking things up at the BOJ as some of his close aides, they said. Finance Minister Taro Aso, though close to Abe, sides with the bureaucrats in suggesting an academic would not be suitable for the top BOJ job that requires strong management skills. His ministry will be compiling a short list of candidates and Aso, who picked Shirakawa when he was prime minister, will have a strong say in who gets the final nod, people familiar with the selection process say. Muto has long-standing ties with many LDP lawmakers and is well regarded in the party that nominated him for governor in 2008. The fact that Kuroda began a second five-year term at the ADB in November 2011 is also acting in Muto's favour because Japan is worried that if Kuroda vacated the position early, it could lose the post to China. Finally, while all political parties want the BOJ under the new leadership to crank up the yen printing presses, they can hardly agree on what an ideal candidate should be like. While some, including conservative LDP lawmakers, say they want an experienced and internationally well-connected manager, others, such as Yoshimi Watanabe, head of the small Your Party, rules out backing a former finance ministry bureaucrat who would bring more of the same. DARK HORSES To get his candidates approved in the upper house, Abe needs votes of the opposition Democratic Party of Japan or, failing that, a combination of votes from smaller parties. The divergence of views among the parties limits chances of dark horses like Kikuo Iwata and Ito winning the nomination, though they could land the deputy governor posts, analysts say. "I don't think dark horse candidates will get approved by parliament. I think the government will play it safe this time and try not to disrupt markets," said Hideo Kumano, chief economist at Dai-ichi Life Research Institute in Tokyo. The LDP has said it wants to get the Democrats' consent. The party, ousted by Abe's conservatives in December's election, has said it would not turn the governor's choice into a political football. The Democrats, who blocked Muto's nomination in 2008 arguing that bringing in a former finance ministry official could compromise the BOJ's independence, now say they do not rule out ex-bureaucrats. In fact, they say they will not back someone who treats monetary easing as a cure-all. That seems to favour Muto over Abe's favoured academics. If the LDP failed to secure the Democrats' backing or find a common ground with the smaller parties, the government could try former deputy BOJ Governor Kazumasa Iwata, who now heads a private think tank, as a compromise candidate. Iwata has repeatedly called on the BOJ to consider buying foreign bonds to help keep yen rises in check, a view that won him fans among political circles but is certain to draw criticism from Japan's Group of Seven partners as indirect currency intervention to weaken the yen.