Japan Proposes Former MOF Head Tanami as BOJ Chief (Update4)

March 18 (Bloomberg) -- Japanese Prime Minister Yasuo Fukuda nominated former Finance Ministry official Koji Tanami as central bank governor, setting a collision course with the opposition who rejected his first choice for being too close to the government.

The Democratic Party of Japan is ``disappointed'' by Tanami's nomination and will have difficulty approving him, said Jun Azumi, deputy chief of the party's parliamentary affairs committee. The party last week rejected Toshiro Muto, 64, who like Tanami was formerly the Finance Ministry's top bureaucrat.

The latest round in the standoff between the ruling Liberal Democratic Party and DPJ raises the prospect the world's second- largest economy will be without a central bank chief when 72-year old Toshihiko Fukui's term ends tomorrow. A vacancy would come as global stock markets plunge and the yen trades at a 12-year high.

``If the DPJ approves this nomination, they would let themselves fall into a political trap because they have argued monetary policy and fiscal policy must be separated,'' said Tomoko Fujii, head of Japan economics and strategy at Bank of America in Tokyo. ``An approval would make the DPJ look like they don't seriously care about the principal issue.''

The opposition controls the upper house and can block central bank governor nominations.

Kiyohiko Nishimura was proposed for deputy governor, according to an upper house statement. Nishimura, 54, has been a member of the bank's policy board since April 2005.

Finance Ministry Background

Tanami, 68, heads the Japan Bank for International cooperation, a state-backed lender. He joined the Finance Ministry in 1964 and served as vice finance minister from 1998 to 1999.

``Tanami is not well known to the financial markets. No one knows his views on monetary policy,'' said Takahide Kiuchi, chief economist at Nomura Securities Co. in Tokyo. ``Many people may assume that someone from the Finance Ministry will take a dovish stance.''

At the ministry, Tanami held positions in the bond issuance and tax departments. Unlike Muto he never ran the budget department.

``The ruling party's argument is probably that Tanami isn't a mainstream finance ministry bureaucrat, while Muto is,'' said Mamoru Yamazaki, chief Japan economist at RBS Securities in Tokyo. ``But such a distinction would mean little to the general public.''

Bond Sell Off

Nishimura is a former professor of economics at the University of Tokyo and worked as an economist at the Cabinet Office. In December 2006 he prompted a bond sell off when he said the Bank of Japan could take policy action even if the market wasn't prepared for it.

``Although the fundamental rule is not to surprise, sometimes small surprises are necessary,'' Nishimura said, causing the yield on the five-year government note to jump 3 basis points. The bank waited until February to raise its overnight borrowing rate to 0.5 percent from 0.25 percent.

Fukuda, 72, may face dissent within his own party for allowing a vacancy at the bank, said Gerald Curtis, a professor of political science at Columbia University.

Shares of Japanese companies have plunged since Fukuda took office in September, pushing the Nikkei 225 Stock Average down 20 percent this year. The dollar slumped below 96 yen for the first time in 12 years yesterday after the Federal Reserve cut the rate at which it lends to banks.

The Japanese currency traded at 97.03 yen to the dollar at 1:23 p.m. in Tokyo today.

`Leadership Disintegration'

``With leadership disintegrating and no real vision for the future, we're heading into another era of rapid turnover of prime ministers as the system limps along,'' Curtis said.

Fukuda's approval rating fell to 33.9 percent in a March 15- 16 Yomiuri newspaper survey, down 4.8 percentage points from February and the worst showing since he took office in September. Support for the opposition DPJ has also faded since it rejected Muto, sliding 2.4 points to 17.6 percent. Almost 60 percent of respondents said they didn't approve of the way the party is blocking the selection of a new Bank of Japan governor.

Both chambers of parliament approved Masaaki Shirakawa, one of two choices for deputy governor, last week. The DPJ-controlled upper house blocked Takatoshi Ito, 57, as the other deputy.

After the upper house rejection vote, Fukuda called the DPJ's behavior ``reckless'' and said he didn't plan to submit new candidates. On March 14 the prime minister reversed course, saying he would reconsider how to avoid a leadership vacuum at the bank over the weekend.

``I'll start from a blank slate and think from now,'' Fukuda said.