Japan raises interest rates, ending years of deflation

JAPAN’S central bank raised interest rates for the first time in six years yesterday, lifting its key rate to 0.25% from 0% and affirming the end of a long era of deflation and economic stagnation.

The Bank of Japan (BOJ) joined central banks in the US and Europe that have already embarked on a credit-tightening cycle, although Japanese interest rates remain minuscule and are likely to stay low for a long time yet.

“We are finally entering a period of having interest rates,” BOJ governor Toshihiko Fukui told a news conference. “That is a delightful moment for the future of the Japanese economy.”

Mr Fukui sought to reassure politicians and jittery markets that the BOJ would be cautious about any further rate rises.

He said the central bank had “no intention” of raising rates at consecutive meetings, a practice that the US Federal Reserve has followed for two years.

In a statement accompanying its decision, the BOJ said “very low interest rates will probably be maintained for some time”.

The impact of the rate rise on the economy is likely to be minimal, said Mamoru Yamazaki, senior economist at HSBC Securities. “Looking at the pace in price increases, I don’t expect the next rate rise until the January-March quarter.”

Mr Fukui repeated that he intended to stay in his job despite a public outcry over his links to an equity fund whose manager has been indicted for insider trading.

“I have caused a fuss and made some people worried,” he said, but added that he wanted to keep fulfilling his responsibilities.

The end to the abnormal interest rate regime is a feather in the cap of Prime Minister Junichiro Koizumi.

“In a certain sense, it’s a recognition of all the things that have been accomplished in the past few years,” said Robert Feldman, chief economist for Japan at Morgan Stanley.