Tokyo, Aug 11: The Bank of Japan decided Friday to end its zero-interest-rate policy and raise a key rate, defying political pressure to maintain the monetary stance. The central bank's nine-member Policy Board voted to lift the 18-month-old policy of guiding the key unsecured overnight call money rate to near zero, the BoJ said. Following the decision, the bank will raise the rate to around 0.25% from near zero, marking its first rate hike in 10 years. Its official discount rate was left unchanged at 0.5%. Prime Minister Yoshiro Mori's ruling Liberal Democrats have repeatedly weighed in against Bank of Japan's Governor Masaru Hayami's recent insistence that rock-bottom rates are now economically irresponsible.
Government officials on the Japanese central bank's policy-making board had proposed that the interest-rate decision be delayed a month until the next meeting, according to sources close to the matter. The boar rejected that request by a majority vote. Mr Mori expressed dismay over the bank's decision to end the zero-rate policy. "I don't deny that it still feels premature," Mr Mori told reporters gathered in the resort town of Hakone, south of Tokyo. Mr Mori also noted that he hopes the central bank will continue to provide ample liquidity to the money market and conduct policy in a "responsive" and "proper" manner.
Precisely because of the public bickering, experts said the central bank had little choice but to guide rates higher to show that the autonomy it won from the Finance Ministry two years ago is real. Analysts had said that raising the rate banks charge each other to about 0.25%, as was widely expected, would be far less damaging for the economy than a loss of BoJ credibility.
Ruling party officials including Mr Mori have said it's too early to lift rates, while the BoJ's Mr Hayami has insisted that GDP forecasts of 2 per cent growth are inconsistent with a zero-interest-rate policy. The bank has expressed fears that over-reliance by corporations on easy money could blunt their international competitiveness at a time when drastic restructuring is needed to secure long-term economic growth. Government officials, meanwhile, worry that higher rates would stifle the incipient economic recovery and possibly set off deflation, or a sharp decline in prices.
The central bank said earlier this week that deflationary fears have abated. The rate hike will likely make it more costly for the government to borrow money to feed massive spending projects that have kept Japan's economy from going under. The BoJ increase was the first in a decade of economic gloom that set in with the collapse of Japan's speculative bubble economy of the 1980s. Fears a rate rise might hurt the economy caused the yen to fall 1.04 from late Thursday to 108.72 yen in Friday afternoon trading. But Japan's main stock index rose 141.85 points, or 0.89%, to 16117.50.
-- (The Wall Street Journal)
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