In a turnaround from its decision not to raise the key short-term interest rate in January, the Bank of Japan raised it to 0.5 percent from 0.25 percent Wednesday. The decision is based on the judgment that the Japanese economy is likely to continue to expand gradually. The decision should be taken as a reflection of the central bank's desire to end abnormally low interest rates and to gain a margin needed to move the key interest rate in a direction it believes is desirable. The BOJ also apparently feared that the continuation of extremely low interest rates might lead to wide fluctuations in capital spending and asset inflation, thus damaging the whole economy.
The increase in the key interest rate is the first since July 2006 when it went up to 0.25 percent from around zero. In January, six members of the nine-member BOJ Policy Board, including BOJ Gov. Toshihiko Fukui, called for no change in the interest rate policy. This time, only Deputy Gov. Kazumasa Iwata, worried mainly about the uncertainty of future price trends, dissented.
The key factor behind the BOJ's decision is that Japan's gross domestic product for the October-December period rose an annualized 4.8 percent growth, exceeding the average market forecast of an annualized 3.8 percent. The central bank said the economy is "likely to continue its moderate expansion with a virtuous circle of production, income and spending in place." It said private consumption is "on a moderately increasing trend" and that consumer prices, excluding those for fresh food, are also on an upward trend in the long run. It also said uncertainties about the U.S. economy are abating.