February 18, 2013 / 7:06 AM / in 5 years

WRAPUP 1-Japan PM to nominate BOJ chief soon, Muto seen lead candidate

* Prime Minister Abe says will choose nominee soon
    * 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
    * Abe keeps up pressure on BOJ, threats of law revision

    By Leika Kihara and Yoshifumi Takemoto
    TOKYO, Feb 18 (Reuters) - Former top financial bureaucrat
Toshiro Muto is the leading candidate to become Japan's next
central bank governor, suggesting Prime Minister Shinzo Abe's
hopes for a more radical policymaker are fading.
    Abe will pick a nominee as early as this week, sources close
to the process told Reuters. The prime minister said he would
make an announcement "soon" on a nominee, who would need to be
confirmed by both houses of parliament.
    Abe led his party back to power in December with promises of
aggressive monetary and fiscal stimulus to lift an economy
dogged for years by deflation. He reiterated on Monday that he
wanted the new BOJ governor to pursue bold monetary easing.
    "I'd like the new BOJ governor to be someone who has the
strong determination and ability to pull Japan out of
deflation," he told parliament, suggesting that revising a law
guaranteeing the central bank's independence was possible if the
authority failed to act aggressively enough.
    He said buying foreign bonds, considered an extreme measure
by many officials, may be one policy option for the BOJ.
    "I'd like to reflect the government's determination (of
beating deflation) through the nomination, which is likely to be
made soon," Abe said.
    His push for looser monetary policy prompted the central
bank in January to take its boldest action to date, doubling its
inflation target to 2 percent and agreeing to an "open ended"
asset buying programme from 2014.
    But some policymakers and government officials worry that
radical measures could unsettle financial markets and add to
Japan's debt burden, already the highest among industrialised
    A sharp yen decline since Abe started pushing for bold BOJ
measures has already sparked global concern over Japan's
policies, although Tokyo avoided direct criticism in a G20
meeting last weekend.
    Ratings agency Standard & Poor's underlined what is at stake
for Abe if his policy mix fails. It reaffirmed its AA minus
rating with a negative outlook, which means a one-in-three
chance of a downgrade in the coming fiscal year.
    It will take time to determine if Abe's policies will work,
S&P said. 
    Choosing Muto, 69, would suggest the Bank of Japan will
intensify stimulus efforts to reflate the economy but also
suggest it would refrain from the more radical measures
advocated by other candidates.
    "The choice of Muto appears to be gaining momentum," said 
one of the sources familiar with the selection process. 
    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, said
several people familiar with the process. They declined to be
identified because the decision is still pending and discussions
remain private.
    Many within Abe's ruling party, including Finance Minister
Taro Aso, feel the top BOJ job should go to someone with strong
management and negotiation skills.
    Muto, currently chairman of private think-tank the Daiwa
Institute of Research, 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. He was the
finance ministry's top bureaucrat and served as deputy BOJ
governor between 2003 and 2008.
    He has said the BOJ has room to boost its government bond
purchases to pump more money into the economy.
    But Muto has warned that underwriting government debt, or
printing money to buy bonds directly from the government instead
from the market, could backfire and trigger a sharp spike in
bond yields, suggesting he would take a more cautious approach
than 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."
    Muto may not be at the top of Abe's short list, which
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.
    Like Abe, Iwata has suggested buying foreign bonds is a
policy option for the BOJ. He believes it is a step that would
keep sharp yen rises in check.
    Advocates say that by buying foreign bonds, the BOJ would
sell yen for foreign currencies and thus help weaken the yen,
giving Japan's exporters a competitive advantage. But doing so
would require a revision to a law giving the finance ministry
jurisdiction over currency policy and may draw criticism from
G20 nations as quasi-currency intervention.
    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.
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