Bank of Japan defies PM to raise rates

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The Independent Online

The Bank of Japan raised interest rates for the first time in 10 years yesterday in a demonstration of independence after a last-minute plea by the government to delay the decision.

The Bank of Japan raised interest rates for the first time in 10 years yesterday in a demonstration of independence after a last-minute plea by the government to delay the decision.

The move to raise the base rate by 0.25 per cent ends Japan's 18-month experiment with a zero interest-rate policy.

The central bank said the decision to raise rates, which was taken by an undisclosed majority vote, was "in line with the improvement in the economy". In a statement, it said: "The Bank of Japan feels confident that Japan's economy has reached the stage where deflationary concern has been dispelled."

Yesterday's announcement is the climax of a battle of wills between the BoJ's Governor, Masaru Hayami, and the Prime Minister, Yoshiro Mori.

Mr Hayami has hinted since April that he was looking to end zero-rate policy. This prompted increasingly shrill cries from the government to maintain a loose monetary policy. Mr Mori was unable to conceal his disappointment at the news: "I can't deny that this was premature," he broke off his vacation to tell reporters. "I call upon the Bank to continue conducting appropriate and flexible operations."

Later, Yoshitaka Murata, the vice finance minister, revealed that representatives from the finance and economic planning ministries at the BoJ meeting had exercised their right to ask the board to delay the decision.

Mr Hayami told reporters he wished he had raised interest rates earlier but said he had delayed because of the G7 meeting of heads of state, the general election and the bankruptcy of Sogo, a leading department store.

The financial markets reacted calmly to the rate decision, which had been expected either yesterday or next month.

Richard Jerram, an economist with ING Barings in Tokyo, said: "If anything this is positive for the equity market because it does show that the independence of the central bank is intact." But the verdict of economists was mixed as some were concerned the hike risked jeopardising Japan's fragile recovery.

"The financial system is still quite delicate and it needs some tender loving care," said Mike Naldrett, of Dresdner Kleinwort Benson Asia.

The head of Keidanren, thebusiness lobby, criticised the move. Takashi Imai said it was "extremely difficult to understand... Their responsibility could be questioned". But Mr Hayami stressed monetary policy was still relatively loose - an argument accepted yesterday by the economic planning ministry.

Later it emerged that the International Monetary Fund had also urged the BoJ not to hike rates. In a report completed last week but issued yesterday, it said it feared such a move could push the country back into recession.

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