MercoPress. South Atlantic News Agency

Japan declares battle with deflation over

The Bank of Japan ended on Friday its six-year of flat zero per cent interest rates after describing the country's economy as “expanding” for the first time in 14 years. On announcing a 0.25% rate officials said they were confident Japan's ten-year struggle with deflation was over, and hinted further rises.

"Today's decision will contribute to ensuring price stability and achieving sustainable growth in the medium to long term" said a release of the Bank of Japan following its unanimous decision, which was backed up by recent figures showing that Japan's economy had turned the corner.

Output has grown in each of the past five quarters, while unemployment has fallen to an eight-year low of 4% and the government recently upgraded its annual growth forecast for the current year to more than 2%.

Interest rates have been increasing across the industrialised world, with the US Federal Reserve and the European Central Bank both acting in recent months to contain inflationary pressures.

But until just a few months ago Japanese officials including Finance Minister Sadakazu Tanigaki had been nervous after what was seen as a premature rise in 2000 led to an extended economic stagnation. The Bank of Japan said it was in no hurry to change monetary policy.

Japan's zero interest policy was introduced in March 2001 to try to revive an economy in recession since the early nineties following the collapse of the shares and real estate markets in the mid eighties.

One of the main problems faced by the Japanese economy was deflation, leaving consumers and businesses reluctant to spend or invest. The zero rate was designed to make it cheaper for them to borrow and less attractive for them to save. However the economy has been expanding in the last five quarters.

Many economists are predicting another rate increase, probably to 0.5%, at the end of this year, or perhaps in the first quarter of next year.

Jesper Koll, chief economist at Merrill Lynch in Tokyo, who called the increase "absolutely" the right move at the right time, predicted rates would stand at 1% a year from now.