By Charles Scanlon in Tokyo

The decision could help turn around the world's second largest economy after more than a decade of stagnation.

Zero percent interest rates and massive injections of public money have done little to stimulate an economy that is once again in danger of slipping back into recession.

Mr Koizumi is under pressure to appoint a governor committed to the fight against deflation which is eating away at the country's prosperity.

Bleak future

In a Tokyo suburb pensioners gather for a monthly meeting at the local trust bank.

The staff serve up tea and cakes. But this is not charity, it is good business.

Retired people are some of the bank's best customers, enjoying generous pensions and large savings from the decades of Japan's economic growth.

But even the affluent elderly are now being hit by the menace of deflation.

The government is cutting their pensions this year.

Sixty four-year-old Keiko Ohgaku is getting worried.

"Social welfare is not provided in this country so I have to depend on my own resources," she said.

"I don't know whether the pension will be enough if they keep cutting it. And things will be much worse for old people in the future."

Widespread problems

Japan is in a downward spiral of falling prices and incomes, the first time deflation has taken hold of a major economy since the great depression.

"A fully fledged deflationary cycle is going on now and it will be difficult to get out of this" Takatoshi Ito, candidate for governor of the BOJ

Banking analyst James Fiorillo says it is no longer just corporate profits that are being hit.

"For households and individuals that bought their house in the 1980s during the inflationary period... they would have lost a tremendous amount of their personal wealth as a result of deflation," he says.

"It's easy to think that if prices are going down people are going to be happy.

"But the fact of the matter is people hold hard assets. So the deflationary environment over the last 10 years has been a major problem for Japan."

Downward spiral

The Bank of Japan long ago pushed interest rates to zero to try to stimulate growth - but the strategy has not worked.

Takatoshi Ito was a strong candidate to become the next governor of the bank, and he says it should print money to fight deflation head on.

"Some say it is not much compared to the great depression of the 1930s," he says.

"But I don't think so because as this is sustained, the people start thinking that prices will be going down in the next five years, companies... start cutting wages, government starts cutting pensions."

"So a fully fledged deflationary cycle is going on now and it will be difficult to get out of this."

'Political show'

But others say printing money could lead to hyperinflation.

Some economists believe Japan's economic malaise is too far advanced to be saved by monetary policy.

Mr Koizumi: Set to appoint a new governor within days

Takehiro Sato of investment bank Morgan Stanley says the prime minister is just using the Bank of Japan appointment as a political show.

"He is likely to seek popularity by the nomination of a pro-inflationary guy, and maybe his approval rate might rise for a short time," Mr Sato says.

"However people will realise that monetary policy will not be the real issue, rather the structural issue is more important."

Alternative solutions

The government says it is trying to clean up the banks, which are paralysed by hundreds of billions of yen in loans that will never be repaid.

But as the banks write off loans, companies go under and unemployment rises.

James Fiorillo of Commerzbank says that reduces consumer demand still further and only increases deflation.

"That can have a negative impact on the economy," Mr Fiorillo says.

"That's why whatever reform package that the government announces needs to have many elements.

"Deflation fighting will not be enough. Reform of the corporate sector by itself also would not be enough.

"There need to be multiple elements including dealing with the banking sector problem and possibly introducing public funds."

Time for action

The Bank of Japan has resisted pressure for unorthodox steps to reflate the economy.

But governorship candidate Mr Ito says time is running out - he argues the bank should buy up risky assets such as stocks and property, if that will help stimulate inflation.

"We don't have the solution written in an economic textbook so we have to be imaginative, we have to be bold and we have to take a risk," Mr Ito says.

"Doing nothing we are sure that will end up in a very uncomfortable position in five years."

Mr Koizumi has long talked of change but in the past he has always settled for half measures.

With the appointment of a new bank governor, he has a chance to show he is still serious about reforming the world's second largest economy.