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Japan taps Fukui as new BOJ chief

By Alex Frew McMillan and wire reports

Fukui was favored to take the top BOJ spot in 1998 before stepping down in a data-for-perks scandal

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TOKYO, Japan (Reuters) -- Japan on Monday tapped conservative candidate Toshihiko Fukui as the new governor of the Bank of Japan.

The choice of Fukui, a career central banker, as the new BOJ chief is likely to disappoint those looking for drastic change from the central bank.

But the appointment of two deputy governors with reformist credentials offset the move, with Japan watchers in any case keen to see any new approach at all to Japan's entrenched problems.

The new deputy governors are Kazumasa Iwata of the Cabinet Office, who is known to favor unconventional monetary policies, and former Vice Finance Minister Toshiro Muto.

Hidenao Nakagawa, the ruling Liberal Democratic Party's chief for parliamentary affairs, announced the nominations. They are still subject to parliamentary approval.

Test of Koizumi's leadership

Fukui replaces Masaru Hayami, whose five-year term ends March 19. Hayami has come under increasing pressure from the government to take unusual or aggressive action to turn around deflation and a flaccid economy.

The nomination of Iwata and Muto suggests coordination between the BOJ and the government will go more smoothly and that the Finance Ministry, which favors a more aggressive monetary policy, will have significant influence on the central bank.

The choice of a new governor has been seen as a test of the leadership of Prime Minister Junichiro Koizumi, under fire for his handling of the economy, and is also key to whether the central bank will get tough in the fight against deflation.

Fukui, 67, spent 40 years at the BOJ but resigned in 1998 with then-Governor Yasuo Matsushita to take responsibility over a scandal over leaked information.

He had been the favorite to take over from Matsushita until a senior BOJ official was arrested, suspected of leaking top-secret money market data to banks for lavish entertainment and golfing trips.

Maintaining the status quo

Analysts said it was unlikely that there would be radical change soon, though the appointment of Iwata, a proponent of aggressive policies, pointed to the possibility of a shift.

"Fukui does maintain the status quo. And so for those in the market looking for aggressive monetary policy directions from the next governor, they are likely to be disappointed," said Thio Chin Loo, senior currency analyst at BNP Paribas in Singapore.

The BOJ race has polarized those who favor radical measures such as inflation targeting, where the BOJ would deliberately push up prices, and those who think such policies are too risky.

But Fukui has not ruled out introducing inflation targets and may take other dramatic steps to pump liquidity into the system.

Stocks advance on move

Japan's stock market advanced on Monday as word broke in local media that Fukui had been tapped for the post.

The Nikkei average ended up 0.6 percent for the day, though the broader Topix gave way to afternoon selling to end down. (Asian roundup)

The yen weakened at the prospect that Iwata favors inflation targeting, which would cause the currency to lose ground.

The yen stands at 118.45 to the U.S. dollar in early European trade.

If approved, Fukui will become the 20th BOJ governor on March 20. He is currently the chairman of a private think tank, the Fujitsu Research Institute.

The governorship race, one of the most keenly watched in years, has centered on the fight against deflation, which has been squeezing profits at Japanese firms for over three years.

Economists are divided on the virtues of rival policies, but united in the view that the world's second-largest economy needs to get its act together, and quickly.

Analysts had already speculated Koizumi, who has said he wants a deflation fighter for the job, might select a combination of people with different policy views to fill the BOJ's three vacancies, giving the nine-member policy board some balance.

But Fukui is not everyone's choice. Jesper Koll, chief economist at Merrill Lynch in Tokyo, says the country is still just muddling through without doing anything "proactive."

"Fukui is the big business candidate, a trusted hand that will continue to steer Japan on a deflationary course," Koll said. "We'll continue to have an accommodative BOJ, not a proactive BOJ."

Reuters contributed to this report.

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