By Leika Kihara and Yuko Yoshikawa
TOKYO (Reuters) - Japan's prime minister is likely to nominate an advocate of aggressive monetary easing - Asian Development Bank President Haruhiko Kuroda - as the next central bank governor to step up his fight to finally rid the country of deflation.
Shinzo Abe won a big election victory in December promising to revive the fortunes of an economy stuck in the doldrums for most of the past two decades. He has repeatedly called for a more aggressive central bank willing to take radical steps.
The yen fell on the nomination news to a 33-month low and the yield on five-year government bonds hit a record low as markets moved to factor in bolder monetary policy.
"Kuroda is a fan of a weaker yen and of deflation bashing," said Kit Juckes, a strategist at Societe Generale in London.
Sources said the government is likely to nominate Kuroda and two deputies this week for parliamentary approval.
It is also lining up Kikuo Iwata, an academic who advocates unorthodox monetary easing steps, and BOJ Executive Director Hiroshi Nakaso, who now oversees the central bank's international operations, as deputy governors, a source familiar with the process said. Iwata told reporters he had been offered the job and he would accept it.
Like the U.S. Federal Reserve, the Bank of Japan has cut interest rates close to zero. Since then it has adopted unorthodox measures to inject cash into the economy, currently in its fourth recession since 2000, to try to stimulate growth.
But Kuroda has long criticized the BOJ as too slow to expand stimulus, and is expected to push for more radical efforts to achieve a 2 percent inflation target set in January.
"Kuroda's nomination won't change the course that has been dictated by Abe in recent months - that is aggressive monetary policy, but perhaps thanks to the inclusion of Iwata the market will expect more eye-catching bold easing measures," said Masamichi Adachi, senior economist at JPMorgan Securities in Tokyo.
The nominations must be approved by both houses of parliament, which means Abe will need opposition support because his ruling-bloc lacks a majority in the upper house. The incumbents leave March 19.
Officials in the Democratic Party of Japan (DPJ) - whose votes could be enough to confirm nominees - have said the DPJ was likely to support Kuroda, although some members may oppose Iwata on grounds that his reflationary views are too extreme.
Iwata has argued the BOJ is mostly to blame for prolonging deflation by not being aggressive enough in easing policy.
In the absence of DPJ support, the smaller Your Party will be key for the government securing approval for its nominees. However, party head Yoshimi Watanabe - an advocate of unorthodox easing steps - criticized the overall line-up as an ill-considered attempt at "balanced personnel".
"Prime Minister Abe's administration took power promising 'regime change' (at the BOJ) but I don't think this will lead to regime change," Watanabe told reporters.
If approved, the nominations increase the chances that the BOJ will ease monetary policy on April 3-4, the first rate review under the new leadership, say officials with knowledge of the central bank's thinking.
"Monetary easing is pretty much a given. The question is what specifically the BOJ will do," said one official, who spoke on condition of anonymity due to the sensitivity of the matter.
The BOJ has already pledged to pump 101 trillion yen ($1 trillion) into the economy by the end of this year by buying assets and through a lending program and to shift to open-ended purchases from next year.
To underline a more aggressive policy in April, the most likely options include starting the open-ended buying sooner than planned and increasing the amount of monthly asset purchases, the officials said.
Extending government bond purchases to maturities beyond the current three-years or buying more risky assets, such as exchange traded funds, are also options.
A drastic overhaul in the way the BOJ buys assets could take some time to materialize, while foreign bond purchases are also unlikely as Kuroda has ruled it out as an option, they say.
Kuroda, 68, has been considered a strong candidate to replace current BOJ Governor Masaaki Shirakawa because of his extensive experience in international policy and his calls for more aggressive monetary easing that matched the views of Abe.
As Japan's top financial diplomat from 1999 to 2003, he aggressively intervened in the exchange-rate market to weaken the yen to support the country's export-reliant economy.
This time, Kuroda - a fluent English speaker with a masters degree from Oxford - may have to mobilize his international contacts to fend off criticism that Japan's monetary policy is aimed at weakening the yen to help exporters.
Kuroda has called for the BOJ to achieve its 2 percent inflation target in two years by pumping money into the economy through unorthodox steps, such as expanding government bond purchases and buying shares. Inflation in Japan has rarely reached 2 percent since the early 1990s.
There are several hundred trillion yen worth of domestic financial assets that the BOJ could buy to expand its quantitative easing, he said on February 11.
The yen has weakened nearly 20 percent against the dollar since November, when Abe began calling for bolder monetary easing.
The cheaper yen has helped improve profits at Japanese exporters, notably carmakers like Mazda Motor Corp, which raised its operating profit outlook for the year ending in March by 80 percent.
Shirakawa's last rate review will be on March 6-7. The BOJ meets twice in April, once on April 3-4 and then on April 26.
Abe has stressed the need for the new governor to have international contacts, suggesting he prefers someone with experience in financial diplomacy, like Kuroda who, as president of the 67-member ADB rubs shoulders with policymakers around the world.
In nominating a BOJ governor, the premier usually respects the views of the finance minister and the ministry's bureaucrats because they work closely with the central bank on economic policy.
The finance ministry lobbied for former financial bureaucrat Toshiro Muto, but was likely turned down by Abe and his aides who saw him as lacking international contacts and less willing to experiment with untried monetary easing steps.
(Additional reporting by Antoni Slodkowski, Tetsushi Kajimoto and Kaori Kaneko.; Editing by Dean Yates and Neil Fullick)