/www.fxserver.com/ TOKYO, Feb 24 - The yen and Japanese government bonds gained on Monday on a report policy conservative Toshihiko Fukui would be the next Bank of Japan governor, while shares also rose though the appointment was seen as less bullish for stocks. The Yomiuri Shimbun said Fukui, now head of Fujitsu Research Institute, could be named as early as Monday to fill the post being vacated by Masaru Hayami, whose term ends on March 19.
In the currency market, the report chased away yen bears and boosted the Japanese currency against the dollar and the euro, dealers said.
Although Fukui had been seen as the front-runner, yen bears had sold the Japanese unit on hopes that Prime Minister Junichiro Koizumi would select a candidate favourable towards a policy of inflation-targeting to combat persistent deflation.
Such a policy would be negative for the yen because it would require massive amounts of funds to be pumped into the market.
Fukui, however, is unlikely to adopt such an aggressive measure.
"With Fukui (as governor), we're not expecting to see the yen come under strong selling pressure as he has been against adopting an inflation target," said Hideaki Furumaya, head of the interbank desk at Trust and Custody Services Bank.
With trade thin, the dollar dipped to a session low of 118.31 yen, but the market was cautious about hammering it too strongly due to concerns that the Japanese authorities may intervene.
In late morning, the dollar was struggling around 118.35/39 yen against 118.64/72 in late New York on Friday.
Dealers said, however, Monday morning's downtrend in the dollar/yen was also led by the euro's broad-based weakness after European Central Bank head Wim Duisenberg hinted at a possible interest rate cut.
COMFORT FOR JGBs
JGBs rose as bond players saw Fukui as "market friendly" and unlikely to take aggressive steps that could lead to inflation.
The yield on the 246th 10-year cash bond ended the morning session down 1.5 basis points at 0.815 percent.
The key March JGB futures contract was up 0.09 point at 142.94, off a session high of 143.06.
"There is a sense of comfort in the market," said a bond dealer at a Japanese trust bank. "But the news is not strong enough to prompt further buying, such as to push down the yield on the 10-year under 0.8 percent."
Finance Minister Masajuro Shiokawa told reporters on Monday that he thinks Koizumi will probably decide the next governor in the afternoon.
Koizumi reiterated he wants someone who will actively fight deflation as the next BOJ governor, but declined to give a specific name.
"I am not that surprised. Though some expected Koizumi to choose someone who would surprise the market, he (Fukui) is the best choice," said Xinyi Lu, chief strategist at UFJ Bank.
"I expect the impact on the bond market to be neutral. If the market was factoring in an introduction of inflation targeting, it (Fukui's appointment) might bring some positive effect, but that is not the case now."
NIKKEI STAGES CAUTIOUS GAIN
The key Nikkei share average rose modestly on hopes that an imminent change of leadership at the BOJ would bring a policy shift favourable to stocks.
But stock traders were more cautious about chasing shares on rallies as Fukui is seen as more conservative about adopting aggressive monetary policy.
Many stock dealers were hoping for the appointment of a radical candidate such as Nobuyuki Nakahara, a proponent of aggressive monetary steps such as inflation targeting that would likely weaken the yen and favour stocks.
Stock traders said, however, that regardless of who is chosen as the next governor the BOJ will be under pressure to take stronger measures to battle deflation.
"The market is betting that, regardless of who the next BOJ governor is, this will be an opportunity for change," said Koichi Seki, equity manager at Chuo Securities.
The Nikkei average .was up 1.06 percent at 8,603.94 by the midsession break. The broader TOPIX index edged up 0.32 percent to 842.77.