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Wed, May 24, 2006 - Page 10 News List

Bank of Japan to raise interest rates gradually


The Bank of Japan will raise interest rates gradually to keep inflation under control while also giving the economy time to recover, governor Toshihiko Fukui said in an interview published yesterday.

"We would like to adjust the interest rate level slowly [but also] not to be excessively behind the curve [too late]," Fukui told the Japanese economic daily Nihon Keizai Shimbun.

"The Japanese economy has just got out of intensive care, so to speak. It needs special care for the moment as it may have some unhealthy parts," he said.

"On the other hand, my judgement on the macro-economy says demand will surpass supply ... so upward price pressures are expected to grow," Fukui added.

Financial markets expect the central bank to soon end the era of near-zero interest rates, possibly as early as July, after it scrapped its five-year ultra-loose monetary policy in March now that deflation is fading out.

The Bank of Japan upgraded slightly its outlook for the economy on Friday while keeping its zero interest rate policy unchanged as expected.

Last week the government said Japan's GDP grew 0.5 percent in the three months to March or at an annualized pace of 1.9 percent, slower than in the previous quarter but still better than expected.

The data also underscored a further easing of deflationary pressures.

Fukui said recent falls in stock prices and the yen's appreciation were unlikely to derail the recovery, saying: "I don't see any shock in the short term that would change the current trend of economic expansion."

Dealers had earlier been speculating about a possible rise in borrowing costs next month but Fukui last week effectively quashed such talk.

The Bank of Japan in March scrapped its deflation-fighting policy of flooding the financial system with cash and returned to a conventional monetary policy of focusing on interest rates like the US and European central banks.

Separately, the ratings agency Standard and Poor's said yesterday that it had upgraded its outlook on Japan's long-term sovereign debt rating, citing an improved economic outlook and corporate restructuring.

S&P's raised the outlook to "positive" from "stable" while reaffirming the rating at AA-minus, meaning Japan has a very strong capacity to repay its borrowings.

"The outlook revision is based on Japan's improved economic prospects, underpinned by restructuring in the private sector, the turnaround in the banking sector through the resolution of bad loan problems, and the elimination of deflationary pressures," S&P analyst Takahira Ogawa said.

"This environment will support the stabilization and eventual reduction of the general government debt burden," he added.

Japan's debt is the highest among industrialized nations after its government spent trillions of yen on emergency stimulus packages to try to haul the economy out of its deflationary doldrums after an asset bubble burst.

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