Muto leads as Japan PM close to choosing nominee for Bank of Japan chief

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By Leika Kihara and Yoshifumi Takemoto | February 15, 2013 3:35 PM EST

Japanese Prime Minister Shinzo Abe is close to selecting his nominee for central bank governor and Toshiro Muto is the leading candidate in a honed down list of names, sources close to the process told Reuters.

If confirmed, the choice of Muto, 69, would suggest the Bank of Japan would step up its monetary stimulus to reflate the economy but probably refrain from some radical steps advocated by other candidates that could unsettle financial markets and risk heightening tensions with Group of 20 nations.

Muto has long been considered a leading candidate to replace Masaaki Shirakawa, 63, who steps down with his two deputies on March 19. He has experience steering fiscal and monetary policies and has close ties with ruling party lawmakers.

"The choice of Muto appears to be gaining momentum," said one of the sources familiar with the selection process.

Abe, who led his party back to power in December with promises of aggressive monetary and fiscal stimulus, has said he wanted the new BOJ governor to pursue bold monetary easing to help pull Japan out of nearly two decades of deflation.

Abe and his advisers have limited the field of final candidates to two or three but have decided to exclude academic and private-sector economists in favour of those like Muto with bureaucratic experience.

The prime minister's short-list still includes Asian Development Bank head Haruhiko Kuroda, Japan's former currency tsar, and Kazumasa Iwata, a former government economist who, like Muto, served as deputy BOJ governor from 2003 to 2008.

Academics advocating unorthodox policy measures who had been deemed as dark-horse candidates, such as economics professor Kikuo Iwata, are likely ruled out, the sources said.

The premier is expected to reach a final decision in the next few days, said several people familiar with the process. They declined to be identified because the decision is still pending and discussions remain private.

Incumbent Governor Masaaki Shirakawa, 63, steps down together with his two deputies on March 19. Under his 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.

OPPOSITION SUPPORT KEY

Abe will need the approval of both houses of parliament for his nomination. His ruling Liberal Democratic Party (LDP) lacks a majority in the upper house, so needs the cooperation of opposition parties, some of which have opposed having a former finance bureaucrat at the BOJ's helm.

Muto has said the BOJ has room to boost government bond purchases to pump more money into the economy. But he has also warned that printing money to finance public debt could backfire and trigger a sharp bond yield spike, suggesting that he will take a more cautious approach than other candidates in expanding monetary stimulus.

Muto, who served as deputy BOJ governor from 2003 to 2008, has downplayed the idea advocated by some lawmakers that the central bank should buy foreign bonds to keep the yen in check.

Currently chairman of private think-tank Daiwa Institute of Research, Muto rose through the ranks of the powerful Ministry of Finance to serve as its top bureaucrat. He was nominated by the LDP in 2008 to lead the BOJ, but his candidacy got struck down in parliament due to opposition by the Democratic Party.

Financial markets expect the next BOJ governor to pursue monetary easing with more vigour than Shirakawa. Abe's push for more aggressive BOJ action has driven the yen to three-year lows and fuelled a stock market rally largely on hopes that exporters will benefit from a weaker currency.

But the yen's 20 percent slide against the dollar since November exposed Japan to international criticism that it was using aggressive monetary expansion to steer the currency lower.

Finance ministry and BOJ bureaucrats have set aside their differences and lobbying fiercely for Muto, favouring his relatively moderate approach.

(Additional reporting by Sumio Ito, Yuko Yoshikawa and Shinji Kitamura, writing by Leika Kihara and Tomasz Janowski)

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