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Japan Appears on Verge of Raising Key Rate

The central bank reportedly has decided to increase it to 0.25% from zero next week. Government officials are split on such a move.

July 05, 2006|From the Associated Press

TOKYO — The Bank of Japan will raise a key interest rate to 0.25% from zero next week, a news report said Tuesday, amid conflicting signals from government officials about the wisdom of such a move.

The bank has "decided in principle" to raise the rate by a quarter-point -- the first hike in almost six years -- at a two-day policy meeting that starts July 13, Kyodo News agency reported, citing unidentified sources.

The report came after Banking and Economy Minister Kaoru Yosano said Japan's economic, price and market conditions were closer to the point where the central bank could lift borrowing rates after keeping them at zero for five years.

Although conditions "haven't fallen into place yet, it's clear that they are falling into place," Yosano said.

"Whether it is in July or August, the Bank of Japan will make its decision as an independent institution of the nation. I believe that it will make its decision responsibly and with discernment," he said.

Prime Minister Junichiro Koizumi also said the timing of a policy change was "something that the BOJ should decide, with a close eye" on price movements, suggesting that he would respect the bank's decision.

But Finance Minister Sadakazu Tanigaki urged the central bank to hold off so as not to torpedo the economy's budding recovery.

"At this point, I believe it's necessary to support the economy through its zero-rate policy, to ensure that the economy sustains growth and will not return to deflation," Tanigaki said.

Top government spokesman Shinzo Abe echoed those concerns, saying that he wanted the Bank of Japan to keep rates at zero "for the time being."

Speculation that the bank will soon raise interest rates has been spurred by recent economic data.

The bank's closely watched "tankan" survey showed that companies were more optimistic about the future, and data have shown consistently rising prices after years of deflation -- a state of downward spiraling prices.

The bank 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 flatlined economy. It has said that it would start raising that rate when prices show consistent increases.

Although the Bank of Japan is officially independent, political opinion often has had an influence on central bank policy.

A scandal over Bank of Japan Gov. Toshihiko Fukui's investment in a fund run by a manager arrested on suspicion of insider trading has also muddied the outlook, with some politicians calling for Fukui to resign. That has some analysts projecting that the bank will hold off.

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