Wednesday, February 21, 2007

Japan Raises Interest Rates

From the WSJ

The Bank of Japan on Wednesday decided to raise interest rates, breaking free from a policy impasse that had kept Japan's super-low borrowing costs unchanged since July, and indicating its continued effort to pursue its goal of slow but steady monetary tightening.

The central bank's nine-member policy board voted eight to one to boost the target for short-term rates by 0.25 percentage point to 0.5%. The move came after the BOJ decided against a rate increase in December and again in January amid persistent weakness in some economic indicators and calls from politicians to keep monetary policy unchanged.

The closely watched move marked the first change in Japan's monetary policy after the Bank of Japan in July ended its five-year-old policy of keeping its benchmark rate at zero.

Despite Wednesday's increase, economists expect the pace of future rate increase will remain slow, given the current sluggishness in personal consumption and slow increases in the consumer price index.

However, it's not a great booming economy yet:

Ativity in Japan's service sector fell for the second straight month in December as warm weather damped retail trade, adding to speculation that consumer spending in the world's second-largest economy has yet to fully recover.


Friday's data showed that the financial-services index climbed 0.8% in December from November, although wholesale and retail trade index fell 0.5%, which reflects the overall trend of consumer spending.

Japanese interest rates have been the root of much speculation among economists for some time. When will they start raising rates and how fast etc.. Well now they have made a first step. However, the recovery of the Japanese economy is still nascent, implying the interest rate policy could change.