Takenaka takes over the financial services portfolio from Hakuo Yanagisawa, who had been widely seen as an obstacle to adopting aggressive action to clean up Japan's ailing banks.

Takenaka had clashed with Yanagisawa over the latter's opposition to a controversial infusion of public funds to help banks clean up the massive bad loans that have cluttered their balance sheets for more than a decade, stalling economic growth.

Speaking after his appointment was announced, Takenaka took a somewhat cautious line.

"A public fund injection would not be a target in itself but one possible result," he told a brief news conference.

"I would like to look at all available options and think of the best way," said Takenaka, who retains his current post as economics minister.

News of Takenaka's appointment sparked a rebound in Tokyo share prices, bolstered the yen and prompted a fall in government bond prices as investors bet bolder reform might now materialise.

"I think that (Takenaka's appointment) is excellent news for the (equities) market. Of all the cabinet people, Takenaka has the most aggressive policy on sorting out the banks' problems," said Garry Evans, a strategist at HSBC Securities in Tokyo.

Koizumi also reappointed octogenarian Finance Minister Masajuro Shiokawa, who has come out in favour of public fund injections if needed to help banks maintain adequate capital as they write off bad loans.

TAXPAYERS' CASH

Speculation that Yanagisawa would be replaced had been followed by talk of a compromise that would let him stay, so the decision to put Takenaka in his place was a bolt from the blue.

"I think it's a complete victory for reformers," said Fiachra MacCana, had of research at West LB Securities in Tokyo.

"I couldn't be happier, both about the resignation of Yanagisawa, but also, most importantly, that he has been replaced with a clear reformer."

Others, though, remained to be convinced that Takenaka, an academic with now firm political base, could match his bold proposals with action.

"It shows Mr Koizumi has a strong will to make changes or to take more proactive action," said Naoko Nemoto, banking sector analyst at Standard & Poor's international credit rating agency.

But she added: "I have some concern about (Takenaka's) leadership, his real ability to make changes.

"He's not at all supported by the financial community or businessmen, so it's very challenging," Nemoto said.

QUESTIONS UNANSWERED

While financial markets applauded Takenaka's appointment, some experts were turning their attention to what happens next.

A decision to inject public funds into banks could still leave key questions unanswered, including whether dead-beat debtor firms would be closed down.

Nonetheless, hopes that the tough political decisions needed would be made have clearly been raised.

"It's not going to be easy, but it is clear that they are gearing up to do what needs to be done to solve the problem," said one Western political analyst.

Japan's economy, the world's second largest, has been mired in the doldrums for a decade and industrial production data released on Monday underscored the uncertain outlook.

The government said on Monday that industrial output rose 1.6 percent in August from July, well below a consensus forecast for a 3.0 percent rise in a Reuters poll of 18 economists.

In other key appointments, Koizumi retained his highly respected foreign minister, Yoriko Kawaguchi.

He appointed LDP lawmaker Shigeru Ishiba as defence minister to replace Gen Nakatani, who had been widely expected to step down following a scandal earlier this year after his staff mishandled information on human rights activists.

Chief Cabinet Secretary Yasuo Fukuda, a close Koizumi aide, also kept his post in the reshuffle.

REUTERS

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