By Linda Sieg and Yuko Yoshikawa
TOKYO, Feb 20 (Reuters) - Prime Minister Shinzo Abe is keen to avoid a rerun of the debacle in 2008 when the seat for the Bank of Japan governor was left open for weeks, so he is carefully calculating the odds that potential candidates will win vital opposition support.
Those political dynamics could complicate prospects for leading candidate Toshiro Muto, a former top finance ministry official who was rejected for the job five years ago when the opposition Democratic Party of Japan (DPJ) nixed his appointment. Unlike in 2008, the DPJ is not flatly ruling out ex-bureaucrats now, but doubts remain about its stance.
Political insiders, who declined to be identified due to the sensitivity of the topic, say support of the DPJ or other smaller opposition parties is key in deciding who gets the job.
Abe's ruling Liberal Democratic Party (LDP) and its smaller partner lack a majority in parliament's upper house, which must approve of the government's nominee.
"The over-riding point is that the nomination goes smoothly with as little controversy as possible in parliament," said Jesper Koll, director of equity research at JP Morgan in Tokyo.
Abe has vowed to end the deflation that has plagued Japan's economy for decades and has made it clear he wants aggressive monetary policy action from the replacement for Masaaki Shirakawa, who steps down with two deputies on March 19.
So far Abe, who staged a rare come-back as premier when the LDP surged back to power in December, has won high support rates from voters for his take-charge image, but must keep up the momentum ahead of an election for the upper house in July.
"They have a 10-out-of-10 so far in terms of proposals being implemented. The supplementary budget was implemented and the BOJ set a 2 percent inflation target in record time," Koll said.
LAY THE GROUNDWORK
Economics Minister Akira Amari said on Tuesday that Abe would "lay the ground work" for agreement with the opposition after the returning from a Feb. 21-24 trip to the United States, where he will explain his "Abenomics" recipe for big spending and hyper-easy monetary policies to President Barack Obama.
Abe's government has said it wants to decide on the nominees by the end of February.
An agreement between the main parties on Tuesday to scrap a rule that any nominee whose name was leaked to the media was automatically disqualified makes it easier to hold unofficial talks with opposition parties, political sources said.
The Democrats, the biggest opposition bloc when the BOJ governor's term expired in 2008, refused then to approve government candidates such as Muto who were former finance ministry officials, arguing it could compromise the central bank's independence. That lead to a gap of several weeks before an appointment could be made to fill the vacancy.
While the LDP and its partner hold a two-thirds majority in parliament's lower house, they have only 102 seats in the 242-member upper chamber, where six seats are currently vacant. The two-thirds majority in the lower house can over-ride the upper chamber to pass laws, but not on personnel matters.
Winning the backing of the Democrats, who have 87 upper house seats, would clearly be the easiest strategy.
Otherwise, the LDP would need to cultivate small parties such as Your Party, which has ruled out ex-bureaucrats and wants the governor to be a fluent English speaker - which Muto is not.
"The question is whether Abe's nominees can win opposition support. If the Democrats agree, it is simple. If not, Your Party will hold the key," said Tomoaki Iwai, a political science professor at Nihon University.
"The Democrats are not saying they are opposed to former bureaucrats. But last time they rejected Muto, so the question is, could they agree this time?" Iwai added.
The Democrats say they learned the risks of playing games with important appointments from their 2009-2012 stint in power.
But whether party executives can bring their battered but still fractious party together following December's resounding election defeat is unclear.
"There would be debate (inside the party) about Mr. Muto since we voted against him 5 years ago," DPJ lawmaker Keisuke Tsumura, a former BOJ official, told Reuters.
"There has been no conclusion yet. But we have decided to focus on the individual, the environment has changed and he has had private-sector experience," Tsumura said, adding both Muto and another potential candidate, ex-government economist Kazumasa Iwata, were well aware of the limits of monetary policy as implemented to date.
Muto, currently the chairman of private think tank the Daiwa Institute of Research, is a favourite of Finance Minister Taro Aso, who wants the top BOJ job to go to someone with a proven ability to run a big organisation.
Muto was formerly the top bureaucrat in the finance ministry and a former deputy governor of the BOJ.
His appointment as BOJ chief this time would signal bolder steps to reflate the economy than Shirakawa, but less radical measures than advocated by candidates such as Iwata, who was deputy BOJ governor alongside Muto.
Iwata has called for the BOJ to consider buying foreign bonds to curb yen strength, a proposal Abe had echoed but which Aso shot down on Tuesday and which the prime minister himself toned down on Wednesday.
While some interpreted the foreign bond-buying fuss as a sign of friction over the BOJ nominee, others said Aso's stance reflected the reality that such a move would spark criticism from abroad, where concerns persist that Japan is trying to weaken the yen so it can export its way out of recession.
"There is a clear G7-G20 statement that makes it practically impossible for Japan to be super bold," Koll said. "It's not because of Aso, it's because of the global agreement and Japan is not going to break ranks."
Abe's list includes Asian Development Bank head Haruhiko Kuroda, Japan's former currency tsar, who favours an aggressive two-year timeframe to meet the 2 percent inflation target.