Japan Daringly Hikes Up Interest Rates

Japan's central bank on Friday announced its first interest rate hike in a decade, defying pressure from government officials who believe near-zero rates are still needed to nurture an economic rebound.

At the end of a marathon meeting, the bank's nine board members voted to guide the interest rate that private banks charge each other from virtually nothing to 0.25 percent, a bank official said, speaking on condition of anonymity.

Led by Gov. Masaru Hayami, who had vocally supported a rate hike, the board voted down a request by government representatives to delay the vote for a month, the official said.

Prime Minister Yoshiro Mori's ruling Liberal Democrats had weighed in repeatedly this week against Hayami's insistence that rock-bottom rates are now economically irresponsible.

At Friday's meeting, government representatives used their right to propose a delay in the board's vote until the next meeting in September. The board rejected that request by a majority vote.

Hayami proposed lifting the 18-month ultra-low-rate policy, and the measure was approved by the policy board.

Experts said the public bickering meant the central bank had little choice but to guide rates higher to show that the autonomy it won from the Finance Ministry two years ago is real.

The Bank of Japan had expressed fears that over-reliance by corporations on easy money could blunt their international competitiveness at a time when drastic restructuring is needed to secure long-term economic growth.

Government officials insisted that higher rates would stifle the incipient economic recovery and possibly set off deflation, or a sharp decline in prices. The central bank said earlier this week that deflationary fears have abated.

The rate hike will likely make it more costly for the government to borrow money to feed massive spending projects that have kept Japan's economy from going under.

Analysts noted that raising the rate banks charge each other to about 0.25 percent would be far less damaging for the economy than a loss of BOJ credibility.

The central bank rate hike was the first in a decade of economic gloom that set in with the collapse of Japan's speculative bubble economy of the 1980s.

Ruling party officials including Mori had been saying it was too early to lift rates, while Hayami retorted that GDP forecasts of 2 percent growth were inconsistent with a zero-interest rate policy.

Fears a rate rise might hurt the economy caused the yen to fall 1.04 from late Thursday to 108.72 yen in afternoon trading. But Japan's main stock index rose 141.85 points, or 0.89 percent, to 16,117.50.

The BOJ could begin as early as Monday to start selling bonds to mop up capital and rein in the amount of funds circulating in the economy, causing banks to raise interest charges when lending to each other. That would have a ripple effect on the rates banks charge to customers.

Hayami wanted to raise rates at the bank's board meeting last month, ut backed away because of the collapse of major department store chain Sogo Co., which sent jitters through Japan's financial markets.

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