Japan has usually headed the ADB as a top donor. Finance Minister Taro Aso said in a statement that Tokyo would soon nominate a "high-caliber candidate" as Nakao's successor.
Aso said the government planned to recommend Masatsugu Asakawa, a former vice finance minister, as Tokyo's choice as "best qualified" for the job.
Nakao, 63, will leave on Jan. 16, 2020. He took the ADB post in 2013 when his predecessor Haruhiko Kuroda was named Bank of Japan governor. He was re-elected to a second five-year term in 2016.
He said he was leaving to make way for someone with "fresh ideas."
Asakawa, 61, was Japan's top currency official for four years before becoming a government adviser in July.
The Japanese financial newspaper Nikkei cited officials expressing concern China might challenge Tokyo's hold over the Manila, Philippines-based bank, which it has headed since its 1966 founding.
The bank said in a statement that "The election for the new president will be in accordance with the open, transparent and merit-based procedure."
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