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2 Japan hikes rates, yen
falls By Hisane Masaki
TOKYO - Taking its cue from recent robust
economic data, the Bank of Japan (BOJ) has raised
interest rates for the first time in seven months,
by a quarter percentage point to 0.5%, in an
attempt to rectify what the central bank itself
views as the "abnormal" state of the credit
policy.
The BOJ's nine-member policy
board, including governor Toshihiko Fukui, made
the decision to raise its key short-term interest
rate by a vote of 8-1 on Wednesday at the end of
its two-
day
meeting.
The target for the unsecured
overnight call rate, which the BOJ uses as the key
target rate in the short-term money market, was
increased to 0.5% from 0.25%, effectively
immediately. It is the first time since September
1998 that the key policy rate has been at 0.5% or
higher.
The interest-rate decision was
taken after Fukui proposed rate hikes at the
policy board meeting earlier in the day. Kazumasa
Iwata, one of the BOJ's two deputy governors,
voted against the rate hikes. It is quite unusual
for the votes to be split among the BOJ governor
and deputy governors.
The BOJ policy board
also decided to jack up the official discount rate
- which effectively serves as the cap on the
overnight interbank rate because the BOJ provides
loans to banks at the rate through its
Lombard-type lending facility - to 0.75% from 0.4%
per annum.
Although most analysts had been
anticipating rate increases in the near future,
they were split over the specific timing, with
some expecting the central bank to wait for a
while to take action.
Fukui has repeatedly
cited the dangers of keeping an ultra-easy
monetary policy for too long and emphasized the
need to carry out phased, small-margin
interest-rate hikes to achieve sustained economic
growth in the medium and long term.
The
rate hikes are the first since last July, when the
central bank ended its unusual zero-interest
policy of nearly six years as the world's
second-largest economy was continuing to recover
and gaining strength after a decade in the
doldrums. At the time the BOJ raised its target
for the unsecured overnight call rate to 0.25%
from effectively zero and the official discount
rate to 0.4% from 0.1% per annum.
The BOJ
had since been cautiously weighing the timing of
its next rate hike, as personal consumption - a
main engine of growth accounting for about 55% of
the nation's gross domestic product (GDP) remains
weaker than expected, and prices have failed to
rise as much as expected in recent months.
The BOJ raised rates on Wednesday after
concluding that the economy is expected to keep
expanding moderately, led by the corporate sector,
and that still weaker-than-expected consumer
spending and prices are also expected to improve
in the medium and long term.
Last week,
the government said Japan's GDP grew at a
stronger-than-expected annual pace of 4.8% in real
terms, or after adjustment for inflation, in the
October-December quarter, the fastest pace in
nearly three years and a significant increase from
0.3% in the preceding quarter. The high growth
rate in the last quarter can be attributed to a
favorable 1.1% rebound in consumer spending after
the decline of the same percentage during the
July-September quarter.
Japanese shares
advanced to their highest level in almost seven
years on the stronger-than-expected GDP figures
last week. Amid growing expectations of a
continued economy expansion and stronger corporate
profits, the 225-issue Nikkei Stock Average has
been hovering at high levels, close to 18,000,
this week. In addition to data pointing to a firm
Japanese economy, the slowing economy of the US,
Japan's biggest export market, now appears headed
for a soft landing. This prospect means a minimal
impact on Japanese exports - and thereby its
economy as a whole.
Economists have been
split, however, over how the growth of personal
consumer expenditure in the last quarter should be
assessed. Optimists think that the drop in
personal spending during the July-September
quarter was a temporary phenomenon due to
unseasonable weather and that a steady improvement
in personal spending will continue.
Pessimists think that the growth in
private consumption during the last quarter only
served to offset the previous quarterly drop and
that consumer spending remains weak. The Cabinet
Office also left its monthly assessment of the
economy unchanged in its February report, released
on Monday, warning about weak consumption. Some
economists have predicted that the GDP growth rate
will greatly slacken in the January-March quarter.
Fukui has said since last spring that the
driver of Japan's economic growth will gradually
shift to consumer spending from corporate
investment. But that apparently has not yet
happened. Consumption is weaker than expected,
largely because of lagging income gains. Japanese
wages still have not reversed their decade-long
slide, even with the country's longest postwar
economic expansion. While businesses plan to
increase their capital expenditures at the fastest
pace in 16 years in the current fiscal year,
higher costs for raw materials and fuel and
increasingly tough global competition make them
reluctant to raise pay.
According to
government figures released recently, wages in
Japan fell at the fastest pace in 16 months in
December as companies pared winter bonuses.
Monthly wages, including overtime and bonuses,
fell 0.6% in December from a year earlier. As a
natural result of this, consumers remain reluctant
to loosen their purse strings as much as expected.
Industry association figures show that supermarket
sales in Japan dropped 3.8% in December from a
year earlier, marking the 12th consecutive monthly
decline on a year-on-year basis.
Even if
salaries rise more quickly, many households appear
more likely to choose to rebuild savings rather
than spend. Most Japanese are increasingly
concerned about a possible sharp surge in
social-security and tax burdens amid the rapid
aging of society and declining birth rates. In
2005, Japan's population began to decline for the
first time since World War II. The country's
working population had begun to shrink several
years earlier.
Experts warn that the
country's social-security systems - such as
pensions, health care and nursing care for the
elderly - will collapse unless there is a
significant increase in social-security
contributions, a reduction in benefits, or a tax
increase. The benefits of the current economic
boom have yet to spread fully to small businesses,
rural areas and households.
In addition to
consumer spending, prices remain weaker than
expected. The domestic demand deflator, a
barometer of
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