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Tuesday 02nd of December 2008
July 14, 2006

Bank of Japan abandons zero interest rate policy


by Elaine Frei

The Bank of Japan met the expectations of most analysts, voting unanimously to raise interest rates above zero for the first time in six years. The unsecured overnight call rate went from zero to 0.25 percent, while the official discount rate rose from 0.10 percent to 0.40 percent.

Along with the rate hikes, the Bank issued its monthly evaluation of the Japanese economy. For the first time, the statement said that the economy was “gradually expanding” rather than using terminology that called it “recovering”. In addition Toshihiko Fukui, the governor of the Bank, issued assurances that further rate hikes would be slow and gradual and that they would likely not come at consecutive meetings.

Mr. Fukui also said that he will not resign his position as governor. He has been under scrutiny recently for his association with a fund manager who was arrested in June on suspicion of engaging in insider trading. Newspaper polls have indicated that up to 72 percent of those polled think Mr. Fukui should resign his position with the Bank.

The decision to raise rates came even though a number of political leaders have made it known that they do not believe that deflation has completely been conquered and that they fear a hike in rates could hurt the growth of the Japanese economy. The officials continue to hold this position even though a number of economic indicators, including figures on gross domestic product growth and surveys of business sentiment, seem to show that deflation has come to an end and the Japanese economy is growing satisfactorily.

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