BOJ terminates zero-rate policy

Quarter-point hike in interest rates signals end of deflation

by Tetsushi Kajimoto

The Bank of Japan ended nearly six years of rock-bottom interest rates Friday, abandoning its “zero-interest-rate policy” and hiking the unsecured overnight call rate to 0.25 percent on the strength of Japan’s steadily improving economy.

Indicating victory in the central bank’s prolonged battle with deflation, the nine-member BOJ Policy Board decided in a unanimous vote to discard the policy after BOJ Gov. Toshihiko Fukui proposed it at the end of the two-day meeting.

The central bank also voted 6-3 to raise the official discount rate from 0.1 percent to 0.4 percent. That will be applied to the BOJ’s Lombard-style lending facility, which allows financial institutions to borrow funds from the central bank with collateral.

At a news conference, Fukui said the central bank had “marked a pleasant step for the future of Japan’s economy” and “managed to take a step to proceed with normalizing its monetary policy in line with the economic growth.”

The decision comes about four months after the BOJ shifted policy in March from its unprecedented quantitative monetary easing to the guidance of interest rates.

It has also prompted banks to start hiking deposit interest rates. Borrowing costs are already on the rise for housing mortgages.

The BOJ has “marked a pleasant step for the future of Japan’s economy,” BOJ Gov. Toshihiko Fukui told a news conference after the meeting. “The BOJ has managed to take an important step to proceed with normalizing its monetary policy in line with the economic growth.”

Financial Services Minister Kaoru Yosano hailed the move, saying the BOJ “freeing itself of the exceptional policy is proof that Japan’s economy is recovering.”

But he said monetary ultraeasing continues.

While the market has factored in the end of the zero-rate policy, Fukui said the BOJ won’t hike rates again soon.

The BOJ “has taken cautious steps in abandoning the quantitative easing and ‘zero-interest-rate’ policy,” Fukui said, adding, however, that this does not mean the BOJ is planning repeated rate hikes.

“The BOJ will step carefully in adjusting interest rate levels, after gauging economic and price conditions,” he said.

Fukui also again defied calls to step down over his 10 million yen investment in the Murakami fund, whose founder faces trial for insider trading.

“Looking back, I regret having caused (a public stir),” Fukui said. “But I have duties to fulfill and I remain resolved to perform them solemnly.”

The BOJ’s zero-rate policy has been an on-again, off-again affair. It was adopted in February 1999 but abandoned on Aug. 12, 2000, only to be revived in March 2001 along with quantitative monetary easing, which was designed to get a grip on the faltering economy following the collapse of the information technology bubble.

Asked if Friday’s policy shift may trigger another economic slump and reinvite deflation, Fukui said the economy for the most part no longer faces a deflation risk.

“Compared with 2000, Japan’s economic growth base has become stronger and more resilient to (outer) shocks,” including the global economic slump, Fukui said, noting companies have disposed of excess capacity and banks have rid themselves of bad loans.

However, some economists voiced concerns that Japan’s export-oriented economy may still be hurt by a prospective U.S. slowdown toward the latter half of the year and that interest rate hikes may not benefit many households.

“It’s up to the future course of economy” to determine whether the nation has overcome deflation, said Takeshi Minami, an economist at Norinchukin Research Institute Co, saying Japan’s economy “remains highly dependent on exports.”

“If the overseas economy slumps, so will the Japanese economy, which may throw it back into a state of deflation.”