The days of borrowing money for free have come to end with Japan’s central bank, the Bank of Japan, raising interests for the first time in almost six years from zero to 0.25%.
Last week, the central bank’s policy board voted unanimously to raise interest rates, noting that “Japan‘s economy is expanding moderately.”
The Bank of Japan has kept interest rates at 0.069% for the past six years in a bid to kick start the country’s economy.
BOJ said it had maintained zero interest rates for an extended period, and the stimulus from monetary policy has been gradually amplified against the backdrop of steady improvements in economic activity and prices.
“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.
“Taking account of the current assessment of economic activity and prices from the two perspectives outlined in the New Framework for the Conduct of Monetary Policy (March 2006), the Bank judged it appropriate to adjust the level of the policy interest rate at this juncture so that a desirable course of economic activity and prices was to be maintained,” BOJ said.
BOJ added that the policy decision will contribute to ensuring price stability and achieving sustainable growth in the medium to long term.
“On the future path of monetary policy, the Bank will conduct monetary policy by carefully assessing economic activity and prices.
“The Bank will adjust the level of the policy interest rate gradually in the light of developments in economic activity and prices if they follow the projection presented in the Outlook Report. In this process, an accommodative monetary environment ensuing from very low interest rates will probably be maintained for some time,” BOJ said.
Thomson Financial’s Asia Pacific chief economist George Worthington said following this move, the monetary policy will remain steady many months, probably into 2007 barring a serious surge in inflation, as the central bank assesses the impact of the rate hike on the economy and prices.
“IFR suspects the move itself will have little immediate impact on growth. Recent indicators have shown most domestic indicators apart from capital spending trending downward, while inflation remains tentative below 1% per annum, with most of the increase due to energy prices.
“IFR suspects that higher energy prices will do more to dampen demand than raise overall inflation, with scant feed-through evident so far as companies lack pricing power in the face of sluggish consumer demand.
“This suggests that another rate hike may well be a long time coming, certainly longer than many now expect,” Worthington added.
By Nelson Yap
