Japan's central bank will decide next week to end the country's zero-percent interest rate policy, paving the way for an increase to 0.25 percent, the Bank of Japan's first hike in nearly six years, news reports said yesterday.
The long-awaited decision symbolizes a dramatic shift for the world's second-largest economy, which for years has kept interest rates at zero to jump-start a struggling economy beleaguered by tumbling stocks, rising unemployment and a trough of deflation -- a continuous spiral of falling prices -- that ate away at workers' paychecks and company profits.
But an increase by Japan would also come at a sensitive time for the world economy, when the two other big economic zones -- the US and Europe -- are on a similar monetary tightening trend.
Last Thursday, the European Central Bank held its key interest rate steady at 2.75 percent, but signaled that an increase could come in early August, far earlier than analysts had expected.
The US Federal Reserve, meanwhile, has increased interest rates 17 times, the latest last week, bringing its key rate to 5.25 percent.
Japan's decision to raise rates will come at a two-day Bank of Japan policy board meeting that starts on July 13, the Asahi and Mainichi newspapers reported, without divulging how they got the information.
The first increase will be from zero percent to 0.25 percent, but neither paper gave a timeline for the hike. The reports said central bankers were confident that Japan's economic rebound was solid enough to sustain the increase, despite the concern of some politicians and business leaders that higher borrowing costs could stifle the comeback.
Earlier this week, however, banking and economy minister Kaoru Yosano indicated resistance is fading, when he said the economic, price and market conditions were beginning to fall into place to allow the bank to lift rates.
"Whether it is in July or August, the Bank of Japan will make its decision as an independent institution of the nation. I believe that it will make its decision responsibly and with discernment," Yosano said.
Prime Minister Junichiro Koizumi also said the timing of a policy change was "something that the BOJ should decide, with a close eye" on price movements, suggesting he would respect the central bank's decision.
Speculation that the BOJ will soon raise interest rates has been spurred by recent economic data.
The bank's closely watched tankan survey showed that companies are more optimistic about the future, while price data has shown consistently rising prices after years of deflation -- a state of downward spiraling prices.
Japan's stock market has rallied over the past year, with unemployment and economic growth also showing improvement. The Bank of Japan last raised interest rates in August 2000, when it raised the overnight call rate to 0.25 percent from zero. The bank lowered that to 0.15 percent in February 2001, and then made it zero in March 2001, where it has stayed since.
Prior to August 2000, the Bank of Japan also had another period of zero rates -- from February 1999 until August 2000.
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