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Japan doubles interest rates signaling end of deflation

Wednesday, February 21st 2007 - 20:00 UTC
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Japan's central bank doubled interest rates to 0.5% Japan's central bank doubled interest rates to 0.5%

Japan's central bank doubled interest rates to 0.5% on Thursday following signs of steady growth in the economy and indicating the end of deflation that has plagued the country for years.

The decision, the second interest rise in more than six years, was taken because the world's second economy "is likely to continue its moderate expansion with a virtuous circle of production, income and spending in place". In July last year, the bank raised the rate to 0.25% following six years of zero interest rates designed to help the economy recover and overcome a serious bout of deflation. According to the official release uncertainties over the future course of overseas economies including that of United States, "are abating and this is likely to reinforce the prospects of continued increase in corporate profits and business fixed investment". Japan's central bank nine-member monetary policy board voted 8-1 in favor of the latest rise, but said future rises would be made only gradually. "The bank will adjust the level of interest rates gradually in the light of developments in economic activity and prices, while maintaining the accommodative financial conditions ensuing from very low interest rates for some time". The belief that there is unlikely to be another increase soon sent the yen falling against the US dollar and the euro. The doubling of interest rates still leaves Japan well below the benchmark rates of 5.25% in the US and 3.5% in the Euro-zone. "With prospects of the economic and price situation improving, the stimulative effect of monetary policy, if the policy interest rate were kept at current level, could gradually increase", reads the bank's statement. With respect to private consumption "the weakness observed during the last summer seems temporary and it is judged that private consumption is on a moderate increasing trend". Regarding consumer prices the Bank of Japan estimates that that the rate of change will be around zero in the short run, (conditioned to crude oil prices development), but on the long term, "the utilization of resources such as production capacity and labor has been increasing and the economic expansion is expected to continue".

Categories: Economy, International.

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