Japan’s Central Bank Raises Key Lending Rate

February 21, 2007 Japan’s Central Bank Raises Key Lending Rate By MARTIN FACKLER TOKYO, Wednesday, Feb. 21 — The Bank of Japan, the nation’s central bank, raised its key benchmark overnight borrowing rate by a quarter of a percentage point, to 0.5 percent, on Wednesday, citing signs of an expanding economy. The bank said in a statement that only one of its nine-member policy board opposed the increase. It was the first increase since July when the bank voted to end more than five years of virtually free credit. The decision followed growth figures last week that showed the economy grew at its fastest pace in three years, though economists said the most important engine of expansion, consumer spending, remains weak. But the bank called the weakness temporary, saying that keeping rates low could actually hamper growth. Central bank officials have been expressing concern that easy money could be fueling twin asset bubbles in the real estate and stock markets, where leading indexes are near seven-year highs. After Wednesday’s announcement, the yen edged up to 119.72 yen against the dollar, from about 120 yen early in the day. The central bank’s rate decisions have been under intense scrutiny as a sign of whether the bank will follow the government’s line in economic policy, or assert its independence. Members of Prime Minister Shinzo Abe’s administration have at times publicly pressured the bank to adhere to the government’s view that higher growth and employment, and thus low interest rates, should be the top priority. While figures released last week showed the strongest growth in three years in the October-December quarter, economists say the benefits are not reaching average Japanese, leading to weak private consumption. Japan’s $5 trillion economy, the world’s second-largest after the United States, has also shown no signs of rising consumer prices, or inflation, which central bankers normally see as an indication for raising rates. In December, a leading consumer price index rose 0.1 percent, in what economists have called another sign that the Japanese are not spending. The central bank’s governor, Toshihiko Fukui, has repeatedly said that he wants to raise rates, eventually to as high as 1 or 2 percent, to “normalize” Japan’s monetary policy. The nation’s current rock-bottom rates are a product of emergency stimulus measures taken during the stagnant 1990s, which most here now feel Japan has safely put behind it. While the low rates have so far failed to kick-start consumer spending, they have led to other worries for the central bank and policy makers. Property prices in Tokyo and some other large cities have risen rapidly in recent years, and the stock market is at an almost seven-year high, leading some to worry that the easy money is fueling twin asset bubbles. The low rates have also depressed the yen. With bank deposits and even long-term government bonds paying meager rates, Japanese savers have been investing overseas, mainly in foreign bond funds, in search of higher returns. Foreign investors have also been tapping Japan as a cheap place to borrow money that they then invest for higher returns in other countries. The cheap yen has been an added stimulus to the economy, bolstering the profits of exporters like Toyota and Sony, whose products become cheaper overseas as the yen declines. But this so-called yen carry trade poses a potential risk of market turmoil, economists say. If rates in Japan rise to 1 or 2 percent, or rates overseas drop, these investors could start selling off their holdings, starting a sudden surge in the yen. That could hurt Japanese manufacturers, leading to pay cuts and lay-offs that could further undermine the overall economy, economists have warned.