- The Washington Times - Thursday, March 9, 2006

TOKYO (AP) — The Bank of Japan yesterday ditched a five-year policy that has kept domestic borrowing costs next to nothing, marking a milestone in the country’s economic comeback and joining a global trend away from easy money.

The decision by the central bank, widely anticipated and watched closely around the world, indicates that the world’s second-largest economy has finally defeated the cycle of tumbling prices that has shackled growth for years.

Timing the policy shift had been a balancing act for the central bank and its governor, Toshihiko Fukui.

Mr. Fukui had pledged to end the five-year, loose monetary policy when the country emerged from deflation, the falling prices that have for years undercut corporate profits and workers’ paychecks.

But some business leaders and politicians, including Prime Minister Junichiro Koizumi, had warned the bank against acting too soon for fear it might choke the nation’s nascent economic recovery.

In yesterday’s announcement, the Bank of Japan pledged to take a go-slow approach, making clear that a transition was starting but making few immediate or dramatic changes that would rattle markets or squelch the nation’s recovery.

It was vague on potential interest-rate increases and said excess liquidity in the financial system would stay unchanged at $255 billion for March and that reducing it to normal levels will take “a few months.”

“Interest rates will stay at zero for some time, then stay extremely low and go through an adjustment period,” Mr. Fukui told reporters.

Economists said the Bank of Japan, or BOJ, may start tinkering with interest rates as early as July, with an initial uptick to 0.25 percent.

That eventual transition would bring the BOJ into line with the U.S. Federal Reserve and the world’s other central banks, which largely rely on interest rates to keep an economy in balance, influence price fluctuations and manage growth.

For nearly two years, the Fed has been boosting interest rates to curb inflation, lifting a key rate to 4.5 percent. Last week, the European Central Bank raised its key interest rate by a quarter point to 2.5 percent.

“We’ve now got synchronized monetary policy everywhere in the world,” said Garry Evans, an economist with HSBC Securities Inc. in Hong Kong. “It’s a sign of confidence in the economic recovery.”

The BOJ has kept its key interest rate, the overnight call rate, at practically zero for five years in an unprecedented effort to rekindle the country’s flat-lined economy. Desperate to spark a recovery, the bank had adopted a “quantitative easing” policy that flooded the banking system with cash to encourage borrowing and lending.

Yesterday, the BOJ’s board voted 7-1 to abandon that approach, but made it clear changes will come slowly.

Glenn B. Maguire, chief economist at Societe Generale in Hong Kong, said he expects the bank to forgo rate increases until December, but that the bank’s decision had been bolder than expected.

“It’s unambiguously good news for Japan. It signals the dark days of deflation are behind us,” Mr. Maguire said.

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