Japan ends zero interest rate era

TOKYO — Japan’s central bank yesterday raised interest rates for the first time in six years, lifting its key rate to 0.25 per cent from zero and affirming the end of a long era of deflation and economic stagnation.

By (Reuters)

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Published: Sat 15 Jul 2006, 10:40 AM

Last updated: Sat 4 Apr 2015, 3:10 PM

The Bank of Japan joined central banks in the United States and Europe that have already embarked on a credit-tightening cycle, although Japanese interest rates remain minuscule and are likely to stay low for a long time yet.

“We are finally entering a period of having interest rates,” BoJ Governor Toshihiko Fukui told a news conference. “That is a delightful moment for the future of the Japanese economy.”

Fukui sought to reassure politicians and markets that the BoJ would be cautious about any further rate hikes. The central bank had “no intention” of raising rates at consecutive meetings, he said, a practice that the US Federal Reserve has followed for two years.

In a statement accompanying its decision, the BoJ said “very low interest rates will probably be maintained for some time.”

Keeping interest rates at zero, however, might have caused disruptive swings in the economy and prices, it said.

Markets had largely factored in the rise in the overnight call rate, but the yen fell on confirmation that it would be a while yet before Japan’s interest rates caught up to those in the rest of the world.

The Nikkei share average closed down 1.67 per cent as worries resurfaced about the impact of high oil prices — another factor that could deter the BoJ from raising rates aggressively.

“This is a historic event,” said Paul Sheard, chief economist at Lehman Brothers. “Barring the hike in August 2000, which turned out to be a false start, the last time that the bank started a tightening cycle was May 1989.”

Still, the impact of the rate rise on the economy is likely to be minimal, said Mamoru Yamazaki, senior economist at HSBC Securities. “Looking at the pace in price increases, I don’t expect the next rate rise until the January-March quarter.”

At his news conference, Fukui repeated that he intended to stay in his job despite a public outcry over his links to an equity fund whose manager has been indicted for insider trading.

“I have caused a fuss and made some people worried,” he said, but added that he wanted to keep fulfilling his responsibilities.

While the scandal did not stop the BoJ from raising rates, it could resurface now that the decision is out of the way. Opinion polls show about 70 per cent of the public want Fukui to quit.

Economy expanding: The end to the abnormal interest rate regime is a feather in the cap of Prime Minister Junichiro Koizumi, who took office in April 2001 pledging painful reforms to fix the stagnant economy.

“In a certain sense, it’s a recognition of all the things that have been accomplished in the last few years,” said Robert Feldman, chief economist for Japan at Morgan Stanley.

Koizumi will step down in September.

While risks such as financial market volatility and a slowdown in the US economy remain, the BoJ appears confident that Japan’s economy is headed for a long recovery.

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