TOKYO (Reuters) - Prime Minister Shinzo Abe nominated an advocate of aggressive policy action to head the Bank of Japan, challenging the opposition to back his push for radical action as officials warned a nascent economic upturn could easily be derailed.
By choosing Asian Development Bank President Haruhiko Kuroda to take over at the central bank, Abe is looking to deliver on an election pledge of overhauling monetary policy to revive the economy after nearly two decades of mild deflation and lackluster growth.
"The new BOJ needs to accelerate its pace of asset accumulation and extend the maturities of government debt that it is buying," said Masayuki Kichikawa, chief Japan economist at Bank of America Merrill Lynch.
"By strengthening monetary easing, the BOJ be able to stabilize the yen exchange rate. Then we will begin to see some positive impact on consumer prices from next year."
Academic Kikuo Iwata, who supports unconventional monetary policy, and BOJ official Hiroshi Nakaso, who has hands-on knowledge of the central bank's inner workings, were nominated as BOJ deputy governors on Thursday.
Abe has already successfully pushed for changes at the central bank, which last month doubled its inflation target to 2 percent and agreed to an open-ended asset buying program from 2014, and the new leadership team is expected to push for even more aggressive action.
The nominations were no surprise to investors, having been well flagged recently, and so there was little market reaction.
The three men need to be approved by both houses of parliament, which will vet them in coming days. Abe does not have a majority in the upper house, and so needs opposition support for his BOJ picks to take office next month.
Soon after the nominations were announced, the challenge facing the three was laid out as the Finance Minister and a BOJ board member both said that despite positive signs, a recovery in the world's third-largest economy was by no means certain.
WATCHING THE YEN
Japan's economy has contracted for the past three quarters, but there have been some signs of life in recent data, including consecutive rises in factory output and signs of a pick-up in the export engine.
A major factor behind hopes of the recovery has been the sharp fall in the yen against the dollar to near three-year lows this month, which was driven by Abe's promises of radical fiscal and monetary stimulus.
However, a 3 percent jump in the yen on Monday, as worries about Italy's election drove investors back to the safe haven of the Japanese currency, has alarmed policymakers who are concerned about the fragility of the economic recovery.
Finance Minister Taro Aso said he was keeping a close eye on the yen, and a BOJ board member said there was uncertainty that the economy would make a full-fledged recovery.
"We will continue to monitor currency moves and make sure the economy recovers by encouraging private investment, jobs growth and an expansion in wages," Aso told parliament.
A weaker yen benefits Japan as it makes exports more competitive and eases deflation by pushing up import prices, although it does weaken its trade and current account balances.
BOJ board member Takahide Kiuchi told business leaders that future stimulus would most likely be through expanding the BOJ's current asset-buying and lending program, although other measures being proposed in markets, such as buying riskier assets, could be examined.
"We will strive to achieve our new target, including through taking additional easing steps boldly when necessary," said Kiuchi, who was one of two board members to vote against adopting the 2 percent inflation target last month.
POLICY LEANINGS
Kuroda, 68, would replace current BOJ governor Masaaki Shirakawa, 63, who is due to leave office on March 19 along with the two deputy governors.
A former finance ministry bureaucrat who oversaw yen-selling intervention from 1999 to 2003, Kuroda has said the BOJ should not buy foreign currency bonds as that constituted currency policy.
On Thursday, Aso was also cautious on such a policy, saying it could be seen as currency intervention and in breach of agreements with other governments.
Kuroda does support increased purchases of government bonds and other domestic assets, such as corporate bonds or exchange traded funds (ETFs), to pump cash into the economy. He has suggested two years as an appropriate amount of time for the BOJ to meet its 2 percent inflation target.
In contrast, Iwata prefers buying more longer-dated government bonds over purchases of corporate bonds or ETFs. Nakaso, who currently oversees the BOJ's international operations, may not feature prominently in policy setting.
(Additional reporting by Stanley White; Editing by John Mair)
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