The upper house of parliament voted down the government's nominee to head the Bank of Japan on Wednesday, setting up a political showdown with a week left before the current central bank chief's term ends.
The stalemate in legislature is a major embarrassment to the Japanese government, as escalating fears of a global slowdown prompted central banks around the world to synch efforts this week to calm jittery markets.
The opposition, which controls the upper house, made good on threats to block the appointment of Toshiro Muto, the Bank of Japan's deputy governor, claiming his long history as a former bureaucrat at the Ministry of Finance would undermine the central bank's independence.
The opposition is also rejecting Muto because of outrage toward the ruling Liberal Democratic Party, which has used its edge in the more powerful lower house to ram through some bills that require approval from only that chamber.
Bank of Japan Gov. Toshihiko Fukui steps down March 19. The appointment of his successor and two deputy governors at the central bank needs approval from both houses of parliament.
Muto was rejected by a vote of 129-106.
The opposition approved one of the government appointments for deputy, former BOJ Executive Director Masaaki Shirakawa. If there is a delay in agreeing on the appointments, Shirakawa is likely to step in to serve as interim bank chief.
The ruling coalition set the lower house vote on approving Muto and others' nominations for Thursday, a parliamentary official said. But even if Muto wins approval there, as he is sure to, that won't overrule the upper house rejection and so the standoff will continue.
The popularity ratings of Prime Minister Yasuo Fukuda have been dropping lately, particularly over the scandal-plagued defense ministry's mishandling of a collision between a military ship and a fishing boat. Many Japanese are eager to see new political leadership.
But opinion is mixed about the opposition's handling of the Bank of Japan appointment.
Major Japanese newspapers were critical of the Democrats in Wednesday's editions.
"The Democrats are irresponsible," the editorial in the Nikkei, the nation's biggest business daily, said. "The Democrats were opposed from the start. Is that the proper response for a responsible political party?"
In confirmation hearings Tuesday, Muto pledged to do his utmost and carry out extensive analysis to promote growth and ensure stable prices amid burgeoning risks, including a possible U.S. slowdown and surging oil prices.
He also promised to uphold the independence of the Bank of Japan.
While few expect the political scuffling to have any immediate damage to Japan's economy, the prospect of a vacuum from such a high-profile position has raised concerns about future monetary policy.
The Bank of Japan has kept its key interest rate at a low 0.5 percent in an effort to sustain the country's modest economic growth. Some analysts say the economy is already showing signs of slowing.
Earlier Wednesday, the government revised down the fourth quarter economic growth figure to a still strong 3.5 percent annual pace. The preliminary estimate had been 3.7 percent.
Chief government spokesman Nobutaka Machimura urged the Democrats to approve Muto.
"What parliament should do is hold discussions at various levels to avoid a vacuum," he told reporters.