By Tetsushi Kajimoto
TOKYO (Reuters) - Japan's government struggled to resolve a deadlock over a new central bank chief on Monday, just two days before the current governor retires, but chances of a breakthrough were unclear even as market turmoil took the dollar to fresh lows and battered Tokyo stocks.
Opposition parties, which can veto nominees to succeed BOJ Governor Toshihiko Fukui, rejected last week the government's pick to replace him, Deputy Governor Toshiro Muto, raising the possibility of a Japanese monetary policy vacuum.
Prime Minister Yasuo Fukuda stressed the need for haste.
"We must decide quickly under a situation where foreign exchanges and share prices are moving," Jiji news agency quoted him as telling government officials and ruling party lawmakers.
Chief Cabinet Secretary Nobutaka Machimura told a news conference the government had not given up hope of making a proposal on Monday, but added the deadline on Wednesday could still be met if the nominee were unveiled the next day.
Asked when the time limit was, Machimura said: "In common sense terms, the time limit has passed, but at the final stage we want to seek parliament's cooperation and clear the deadline."
Machimura said earlier that all options were on the table, but a ruling partly lawmaker told Reuters there was virtually no chance Muto's name would be put forward again.
The showdown reflects a broader political deadlock that is undermining confidence in Prime Minister Yasuo Fukuda's administration, already suffering from sagging poll numbers.
The stalemate also coincides with a global credit crunch and fears that the U.S. economy is already in recession, concerns that took the dollar below 96 yen to a 13-year low on Monday, as well as to record lows against the euro
The Tokyo stock market's benchmark Nikkei average <.N225> slid to close down 3.7 percent, or 454.09 points, at 11,787.51, its lowest finish since August 2005.
Although the Federal Reserve lowered its discount rate to 3.25 percent from 3.5 percent late on Sunday, fears were growing that more financial institutions could become casualties in the widening crisis, after problems at investment bank Bear Stearns led to its sale to JPMorgan Chase.
Analysts said the deadlock over Fukui's successor would not have a big impact on monetary policy, since Japan's interest rates are already near rock bottom, but the confusion would complicate efforts to coordinate global monetary policy.
"We're in a situation where some kind of joint action by central banks may be needed -- such as a joint intervention in the currency market, perhaps -- but the policy people are busy with this mess," said Takahiko Murai, general manager of equities at Nozomi Securities.
Opposition to Muto as the next BOJ chief centered on the fact that he is a former senior bureaucrat at the Ministry of Finance, a background that lawmakers in the main opposition Democratic Party insisted would put monetary policy independence at risk.
But opposition Democratic Party Secretary-General Yukio Hatoyama said on Sunday that his group would not automatically rule out all career MOF officials.
Haruhiko Kuroda and Hiroshi Watanabe, both former vice finance ministers for international affairs, could be good candidates, Hatoyama told a TV program.
Kuroda, who has headed the Asian Development Bank since 2005, was Japan's top financial diplomat from 1999 to 2003. He has been an advocate of Asian regional cooperation, calling for the creation of a common Asian currency in the long run.
Watanabe retired from the finance ministry last year and is now an adviser at a government-linked think tank.
Japanese media said the opposition had rejected on Monday a suggestion to extend Fukui's tenure beyond Wednesday, but Machimura said the reports were wrong, without specifying how.
Local media also said some LDP members wanted to nominate former Toyota Motor Corp <7203.T> Chairman Hiroshi Okuda as BOJ governor.
One option could be for former BOJ official Masaaki Shirakawa to run the central bank, at least temporarily.
Picked by the government to be a deputy governor, he was the only BOJ nominee to win parliamentary approval last week.
The Democratic Party and smaller allies control parliament's upper house, which gives them the power to veto government nominees for the BOJ as well as delay laws.
The resulting paralysis adds to pressure on Fukuda, whose support has already slipped to around 30 percent on doubts about his leadership, a level that could encourage rivals in his own party to try to replace him.
(Additional reporting by Yoko Nishikawa, Leika Kihara, Elaine Lies, Hideyuki Sano, Yuzo Saeki and Teruaki Ueno; Writing by Linda Sieg; Editing by Rodney Joyce and Gary Crosse)