Japan central bank hikes rates to 0.25%

GOING UP: The bank's widely anticipated move puts Japan in line with monetary policy in Europe and the US and indicates the nation's economic recovery is gathering pace

AP , TOKYO

Sat, Jul 15, 2006 - Page 10

Japan's central bank raised interest rates yesterday for the first time in six years, ending an era of zero percent interest and sending the clearest signal yet that the world's second-largest economy has pulled out of a decade-long slump.

The decision boosts the Bank of Japan's (BOJ) key overnight discount rate to 0.25 percent from 0.069 percent -- effectively zero.

The move was widely anticipated by analysts and investors, and puts Japan in line with monetary policy in the US and Europe, where central banks are also tightening the reins on easy money.

"Today's decision will contribute to ensuring price stability and achieving sustainable growth in the medium and to long term," the BOJ said in a statement released after the policy board's vote to raise rates at the end of a two-day meeting.

Japan instituted zero rates in 2001 in an attempt to jump-start the beleaguered economy and wipe out a destructive trend of spiraling price declines, known as deflation, that eroded corporate earnings and workers' paychecks.

Raising rates underlines that deflation is quickly becoming a distant memory and that the economic recovery is gathering speed.

It was "absolutely" the right move at the right time, said Jesper Koll, chief economist at Merrill Lynch in Tokyo.

"Zero interest rates were a necessary emergency policy," he said. "But Japan needs the beginning of a normalization process. Normality means money isn't free."

In a nod to concerns that higher borrowing costs could stifle Japan's nascent economic comeback, the central bank emphasized however that "very low interest rates will probably be maintained for some time" and that future changes will come gradually.

The move also links Japan with the other major economies in terms of monetary policy. Last month, the European Central Bank raised its key interest rate to 2.75 percent, while the Federal Reserve has lifted the fed funds rate 17 times straight to 5.25 percent.

Japanese stocks fell -- but some of that was attributed to worries about soaring oil prices amid rising unrest in the Middle East, traders said. Tokyo's benchmark Nikkei 225 Index fell 252.71 points, or 1.67 percent, to 14,845.24 points, bringing its four-day loss to more than 4 percent.

Still, compared to six years ago, Japan's economy is much stronger, with corporate profits up, unemployment falling to eight-year lows and prices rising. The economy has turned in five straight quarters of growth, and forecasts call for up to 3 percent growth this year.

Proponents of a rate hike say it is needed to head off inflation as Japan recovers. May's consumer prices rose 0.6 percent for the seventh monthly gain.

"In this environment, maintaining the previous level of the policy interest rate may result in large swings in economic activity and prices in the future," the BOJ said.