The move sets the stage for another tug of war between the ruling Liberal Democratic Party (LDP) and the main opposition group Democratic Party of Japan (DPJ), which has indicated that it does not favour the 64-year-old Mr Muto.

The two camps have a little over a week to come to an agreement as BOJ governor Toshihiko Fukui's term ends on March 19.

The government has also nominated former BOJ executive director Masaaki Shirakawa, 58, currently a professor at Kyoto University, and Tokyo University economics professor Takatoshi Ito, 57, to serve as deputies to the new governor.

Chief Cabinet Secretary Nobutaka Machimura said that the government considered the three nominations 'the best choice'.

Prime Minister Yasuo Fukuda warned on Thursday that leaving the governor's post vacant would damage the central bank's international credibility amid the current turmoil in global financial markets.

'We cannot have a vacuum, not even for one day,' Mr Fukuda said, adding that Mr Muto's ability to do the job well should be the issue, not his background.

Many DPJ lawmakers are against Mr Muto as they believe his earlier experience as vice-minister - the most senior bureaucratic post - in the powerful Finance Ministry could compromise the independence of the central bank's policymaking.

Mr Fukuda said that he was ready to hold direct talks with DPJ leader Ichiro Ozawa to find a breakthrough.

The DPJ is also peeved about the LDP's bulldozing of the fiscal 2008/09 budget Bill and a tax reform Bill through the Lower House last month, despite calls for more deliberations.

Five years ago, the DPJ had rejected Mr Muto's appointment as deputy bank governor, but at that time the LDP controlled both Houses of parliament and its personnel appointments were passed unopposed.

This time, the opposition dominates the Upper House, and it can veto the government's nominees if it disagrees with the choices.

The three nominees are due to attend hearings at both Houses of parliament next Tuesday to answer questions about their policy stances.

The two chambers are likely to vote on the appointments next Friday.

Financial markets are said to be keen for Mr Muto to take the top job because of his expertise in fiscal and monetary affairs.

He is expected to steer the same policy course as the current governor.

Senior economist Hideo Kumano of the Dai-ichi Life Research Institute believes that Mr Muto's former career in the Finance Ministry should not be a hindrance.

A former BOJ official himself, Mr Kumano said that the central bank had suffered in the past because it had difficulty fending off lawmakers who wanted to influence monetary policy, especially when it looked like the BOJ was bent on raising interest rates.

'Mr Muto's proven ability to handle lawmakers will help the BOJ to resist such pressure from politicians,' said Mr Kumano.

A rate increase means that the government has to pay higher debt-servicing costs on the huge amount of national bonds that it issues to cover revenue shortfalls.

wengkin@sph.com.sg