The Bank of Japan has raised the cost of borrowing for the first time in nearly six years. It was put up to 0.25% from almost zero. However Governor Toshihiko Fukui and his policy board committee said they will move slowly and keep rates very low as the economy continues to recover from years of stagnation and deflation.
Japan is still far behind other major economies. Last month the US Federal Reserve boosted its interest rate to 5.25%, the European Central Bank to 2.75% and Britain’s rate remained unchanged at 4.5%. The raise comes despite oil prices hitting a record high, escalating Middle East tensions and North Korea conducting missile tests near Japan.
Economists believe Japan’s economy is strong enough to cope with a rate rise. Hiromichi Ishikawa, chief economist at Credit Suisse Securities Japan, said: “We don’t believe that the economy is returning into a deflationary situation because Japanese companies have strength on their balance sheets, the banks are now in a better shape, and it’s very difficult for us to believe that the economic growth is going down to say 1%. I think 1.5% to 2% growth will be maintained next year.”
Many economists do not think there will be another Japanese interest rate increase until at least October and some are saying it may not happen before the next fiscal year begins in April 2007.