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Japan Government Picks Muto to Head Central Bank

The Japanese government put forward deputy central bank governor Toshiro Muto on Friday as the next head of the Bank of Japan, raising the prospect of a showdown with an opposition wary of close government ties.

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A political wrangle over the governor nomination has dented the government's credibility and raised fears of a policy vacuum in the midst of global market turmoil when the current BOJ governor, Toshihiko Fukui, retires in less than two weeks.

The government nominated 64-year-old Muto, long seen as its favored candidate, a government nomination paper provided to Reuters showed, confirming reports by senior ruling party and opposition lawmakers.

Muto was also the pick of the markets, despite the risk that the opposition may veto the nomination.

"There is a 50-50 chance of the Muto nomination going through. It's hard for one to predict whether it can or not, as it is now totally up to the political situation within the Democratic Party," said Masamichi Adachi, a senior economist at JPMorgan Securities.

The nomination came as the central bank left interest rates unchanged at 0.5 percent at Fukui's last scheduled policy board meeting as governor.

Opposition parties can block Muto because they control parliament's upper house, which must approve the appointment.

If he gets past that political hurdle, Muto will take charge of interest rates at a time when growth in Japan is stumbling, thanks to the credit crunch that has raised fears of a U.S. recession.

Some economists say Japan, the world's second-biggest economy, may already be in recession and the BOJ may need to cut its already very low interest rates this year.

Opposition Wary

Resistance to Muto centres on concerns that he was previously a vice finance minister, a senior bureaucratic position in the government. Some opposition lawmakers fear that appointing such a person would undermine the central bank's independence.

"We have been saying at informal meetings that it would be hard to accept Muto if he is nominated," Kenji Yamaoka, parliamentary affairs chief of the main opposition Democratic Party, told reporters.

While markets have focused on U.S. recession fears and a sliding dollar, traders say months of political paralysis on a range of issues, including the BOJ succession, have weighed on Japanese stocks.

"To look at this on the bright side, a candidate has been put forward who seems to be an entirely reasonable choice. But he is not the person who is going to drastically change Japan," said Ken Masuda, a senior equities dealer at Shinko Securities.

"But the big worry here was that they wouldn't be able to decide on someone, and that would lead to further selling (of stocks)."

The government put forward Masaaki Shirakawa, a former BOJ official, and academic Takatoshi Ito as deputy governors.

"Professor Ito has been pretty critical of the BOJ and has been a proponent of inflation targeting, writing a book on the topic. So it will be interesting how he functions in the BOJ," said Lehman Brothers economist Hiroshi Shiraishi.

The nominations will be considered by parliament next week and ministers called for an end to the political row.

"We cannot allow any policy vacuum with the BOJ governor at a time when global economic conditions are unstable," Finance Minister Fukushiro Nukaga told a news conference on Friday. "I hope both houses of parliament will take the proper steps."

Ruling Party Confident

If a replacement is not found by Fukui's retirement date of March 19, a temporary governor would step in. Analysts say it is unlikely that a stopgap governor would take long-term decisions.

Failure to agree on a new governor, on top of a wider political paralysis in parliament, could undermine Japan's market credibility, they add.

"If a vacuum in the BOJ governor's position were to occur, that would likely provide foreign investors with one more reason to sell Japanese stocks, though the actual impact on policy-making is very small," said Kazuhiro Takahashi, general manager of equity marketing at Daiwa Securities SMBC.

No change in interest rates had been expected from Fukui's last scheduled policy meeting but the central bank may revise down at 3 p.m. Tokyo time its economic outlook on worries that slowing U.S. demand prompts Japanese companies to slash output.

Japan's economy had been growing steadily, enabling Fukui to raise interest rates to 0.5 percent from zero. He had sought to continue raising rates to more normal levels but that policy has been hamstrung by the global credit turmoil.