- The Washington Times - Friday, July 14, 2006

TOKYO (AP) — Japan closed the door on an era of next-to-nothing borrowing costs yesterday when its central bank raised a key interest rate for the first time in six years, ending an unorthodox experiment meant to jump-start the country after a decade of economic doldrums.

For Japanese households, the Bank of Japan’s decision to lift its key rate to 0.25 percent from 0.069 percent — effectively zero — promises higher interest on new loans but better returns than the dismal 0.001 percent interest they were earning in retail bank savings accounts.

For the resurgent corporate sector, however, it was a harbinger of tighter credit and uncertainty about future profits.

Declaring the unusual five-year stretch of zero-percent interest rates a success, the central bank’s policy board voted unanimously yesterday to finally switch gears.

“This is the first step toward normalization,” said Masaaki Kanno, an economist with JP Morgan Securities. “It’s a clear sign that now the Japanese economy is doing OK. The timing of the increase is quite good.”

The zero-percent interest policy did not mean Japanese consumers and businesses were able to get interest-free loans. Japanese banks still charged interest.

Almost immediately after the rate increases, Tokyo-Mitsubishi UFJ Bank, the world’s biggest bank by assets, announced it would jack up interest on basic savings accounts to 0.1 percent, from 0.001 percent, starting Tuesday.

By boosting rates, the Bank of Japan demonstrated leadership and independence at a time when its Gov. Toshihiko Fukui is battling calls to resign — and political pressure to hold off on raising rates.

The move also puts Japan closer in step with the world’s other big economies. 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.

In the weeks leading up to yesterday’s decision, several ruling party officials had urged the bank to keep rates at zero, worried that the Bank of Japan would repeat the mistake it made in August 2000, when it lifted borrowing rates prematurely — and choked a recovery.

Mr. Fukui emphasized that the bank is acting cautiously and that the economy is on much better footing now.

“We are not embarking on so-called consecutive interest rate hikes,” Mr. Fukui said at an afternoon press conference. “We will carefully study the state of the economy and prices to gradually adjust interest rates.”

Corporate profits are up, unemployment is at eight-year lows, and household spending is on the rise. The economy has turned in five straight quarters of growth, and forecasts call for up to 3 percent growth this year.

LOAD COMMENTS ()

 

Click to Read More

Click to Hide