(Includes full names of nominees at first reference, para 3)
* Kuroda, Iwata have different approaches to policy
* They will oversee a board which is also split
* Could complicate decision making, delay radical change
By Leika Kihara
TOKYO, Feb 26 (Reuters) - Prime Minister Shinzo Abe is seeking to put at the top of the Bank of Japan two officials with different views on how to beat deflation, which could complicate decision-making in an already split board as it eyes a drastic make-over of monetary policy.
The new leadership, if nominated and approved by parliament, will join a board dominated by advocates of more stimulus, increasing the chances the BOJ will ease again at its first rate review next month and possibly more frequently down the road.
Abe is likely to nominate Asian Development Bank President Haruhiko Kuroda as the next governor, sources have said. The government is also lining up Kikuo Iwata, an academic, and BOJ Executive Director Hiroshi Nakaso, who now oversees the central bank's international operations, as deputy governors.
At first glance, the expected new team is a balanced one with a governor with strong international contacts, an academic sharing the premier's calls for unorthodox stimulus as deputy and a conservative central banker taking the other deputy's post.
But they differ on what approach to take on monetary policy and face a board that is also split on how to proceed to revive growth. That is likely to test the new governor's leadership and may delay any radical change in the way the central bank sets policy.
"There's a gap in how Kuroda and Iwata approach the means for monetary easing," said Yasunari Ueno, chief market economist at Mizuho Securities in Tokyo. "Markets will be focusing on how they would mend this gap."
The Bank of Japan, like the U.S. Federal Reserve, has been forced to adopt unorthodox policy measures after cutting interest rates - the usual policy tool for central banks - close to zero.
The BOJ has had an asset-buying programme since 2010 to pump cash into the economy, but with little apparent success in defeating years of deflation. Abe has pushed the central bank to be more radical.
Kuroda sides with a "credit easing" approach to policy, in which central banks funnel money directly into credit markets, such as corporate bonds or exchange traded funds (ETFs), to nudge up asset prices and encourage investors into taking on more risk.
Iwata prefers expanding Japan's monetary base by boosting purchases of longer-dated government bonds, instead of risky assets. The central bank currently buys bonds with up to a three-year maturity.
He belongs to a camp of academics who advocate quantitative easing, a policy of pumping money into the economy through government bond purchases, and believes that deflation can be overcome by flooding markets with cash.
The other expected deputy, Nakaso, is not expected to feature so heavily in setting policy, although his experience will be vital in understanding the inner workings of the BOJ and other central banks.
The BOJ's asset-buying and lending programme already combines credit and quantitative easing. It targets both government bonds and riskier assets such as corporate bonds, commercial paper, ETFs and real estate trust funds (REIT).
The BOJ has agreed to pump 101 trillion yen ($1 trillion) into the economy this year, but in January said it would adopt an "open ended" policy from 2014 of buying 2 trillion in government bonds and 11 trillion of other assets each month to push cash into the economy to achieve its 2 percent inflation target.
Now to underline a more aggressive policy, Kuroda and Iwata must agree on the balance between a credit risk approach and expanding bond purchases.
Kuroda said this month there are several hundred trillion yen worth of domestic financial assets the BOJ could buy to expand its programme, but reflationary experts suggest only government bonds provide the scale needed to revive the economy.
Down the road, the two also need to debate whether to stick to the asset-buying programme, or seek a new way to pump money into the economy in order to show the central bank has embarked on a "regime change" as demanded by Abe.
"If the new leadership isn't content with an increase in the programme, the BOJ would have to come up with something new," said an official with knowledge of the central bank's thinking.
In reality, the BOJ is likely to steer more toward Iwata's approach of increasing the amount of government bonds it buys because boosting purchases of risky assets would expose the central bank's balance sheet to potential losses, something many board members are reluctant to do, say officials with similar knowledge.
The BOJ sees limited room to diversify the type of risky assets the bank buys beyond what it already accepts under the asset-buying programme, arguing that other credit markets are too small in Japan for the BOJ to be able to make regular purchases that would have a broad impact on the economy.
"There may be several ways to make it appear the BOJ is doing something new. But in the end, what it can do is expand purchases of government bonds and possibly ETFs," said the official, who spoke on condition of anonymity due to the sensitivity of the matter.
Beyond their own differences, Kuroda and Iwata will face the challenge of reaching a consensus in a board divided on the bank's next move.
Some want to go down the route of aggressive bond purchases, while others see limits to expanding these purchases when yields are so low. Five-year bond yields, for example, are at a record low.
Unlike the other candidates, including former deputy BOJ governors Kazumasa Iwata and Toshiro Muto, both Kuroda and Kikuo Iwata have no direct experience guiding monetary policy. That means they would lean more on the BOJ bureaucrats to come up with new ideas, analysts say.
Central bank bureaucrats are brain-storming various ideas but most of them are still in the early stages and won't be firmed up until the new BOJ leadership is confirmed and its policy stance becomes clearer.
Among the options central bank bureaucrats consider as realistic in the near term are extending the duration of government bonds the BOJ buys beyond three-year maturities, and beginning open-ended asset purchases earlier than 2014.
"Anything the BOJ can do immediately would be an extension of its current policy framework," said Mari Iwashita, chief market economist at SMBC Nikko Securities in Tokyo, pointing to a further increase in bond purchases as the likely next option. ($1 = 93.2200 Japanese yen) (Editing by Neil Fullick)