Interest rate rises but yen retreats at central bank warning

THE Bank of Japan (BOJ) raised its main interest rate yesterday by a quarter percentage point to 0.50%, the highest in more than a decade, but the yen retreated as the central bank signalled caution on further increases.

The BOJ, whose board voted 8-1 for the rise, said the economy was likely to continue growing and it would make further rate adjustments only gradually.

BOJ governor Toshihiko Fukui, in a news conference, echoed that view and said the central bank does not have specific schedules for future rate hikes, such as consecutive rate rises.

In pushing up the cost of money, at a time when many politicians have expressed concern about the Japanese economy, the central bank has underlined its independence. Ironically, that too could be a bad omen for the yen. Analysts believe the BOJ’s hawkish stance might influence the Japanese government when it nominates future board members in two months, as the terms of two of the nine board members expire.

The government, playing down the idea of any rift, said its monetary policy was up to the BOJ.

“I understand the BOJ reached its conclusion after a thorough examination and discussion,” Finance Minister Koji Omi told parliament. “I’d like to respect that decision.”

However, a ruling party heavyweight, Hidenao Nakagawa, was quick to say the BOJ would be held responsible for its rate hike decision. Politicians are sensitive about the economy ahead of July’s upper-house elections.

The yen went on a rollercoaster ride, strengthening half a yen to around 119.75 per dollar just after the rate rise but then losing all of its gains as the market digested the BOJ comments and reckoned this could be the last move for some time.