Japanese interest rates rise for first time in 10 years

The Bank of Japan yesterday defied government pressure and raised interest rates for the first time in 10 years, sparking renewed concern at home and abroad about the outlook for the lacklustre Japanese economy. Within hours of the decision, the International Monetary Fund published its annual assessment of the Japanese economy, concluded last week, warning that the country's economic recovery was fragile and urging the Bank of Japan to stick to its zero interest rate policy. After a longer-than-usual policyboard meeting yesterday the central bank decided to scrap the zero rate policy, which was put into force in February last year as an emergency measure to cope with Japan's prolonged recession.

The unsecured overnight call rate will now be 0.25 per cent, although the official discount rate will be kept at 0.5 per cent. Under the previous policy, the bank had been flooding the money markets with sufficient funds to keep overnight interest rates near zero. The rate increase was made in spite of unusually strong domestic and overseas political pressure on the bank not to raise interest rates, and a government request to postpone the vote. The US and other countries fear that the increase could jeopardise the prospects for Japan's economic recovery, which in turn could lead to a global slowdown. Masaru Hayami, the bank's governor, emphasised that the increase was "a minor adjustment, not a tightening".

He said the increase was merely a normalisation of monetary policy. "The call rate is at a very low level and so monetary policy will continue to support the economy," he said. "We hope the Japanese public will take this as a sign that the Japanese economy is recovering." The IMF's report on Japan, however, said that even before the rate rise it expected only an "underpowered and uneven" recovery in 2000-2001, and warned that a premature tightening of monetary policy ["]could push the economy back into recession". However, the move was criticised by Japanese government and business leaders.

"There is no denying that the bank's decision appears too early," said Yoshiro Mori, the prime minister.