Japan's central bank raises key interest rate a quarter point to 0.5%

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By Yuri Kageyama, Associated Press TOKYO — Encouraged by signs of robust economic growth, Japan's central bank raised its benchmark interest rate a quarter point to 0.5% Wednesday, judging that price stability and consumer spending would withstand slightly tighter credit. The Bank of Japan's decision, at the end of a two-day monetary policy board meeting, highlights confidence in the continuing moderate recovery in the world's second-largest economy. The vote among the nine-member board was 8-1 in favor of the hike, the bank said. "The bank thinks that even if prices drop, that won't cripple economic growth, and conditions were ripe for a rate hike," said Takeo Okuhara, bond strategist at Daiwa Institute of Research in Tokyo. "The bank made the right choice." On the Tokyo stock market, the benchmark Nikkei index rebounded temporarily, as relief set in that another rate hike will not come for a while — but it finished down 0.14%. The dollar, which had slipped on Japanese media reports of an imminent rate raise, also rebounded after the move, trading at 120.44 yen, as another rate hike is unlikely for months. Views had been split over what the bank would do amid mixed signals from recent economic indicators. Last week, the government said Japan's economy grew at a stronger-than-expected annual pace of 4.8% in the fourth quarter — fastest rate in nearly three years. But the government also left its monthly appraisal of the economy unchanged in its February report, released Monday, warning about weak consumption. Determined to escape decade-long stagnation, the Bank of Japan has kept interest rates at virtually zero since March 2001. The raise to 0.25% in July last year was the first hike in six years. The Bank of Japan said Wednesday that gradual growth will likely continue amid healthy production, income and company investments, and worries were diminishing about the future of the American and other overseas economies. It also said a dip in consumer spending last summer was temporary, and spending may be on a rebound. For the first time, the Bank of Japan gave the names of the officials who had voted in favor or who opposed the rate hike, and showed how the decision had been split among the governor and deputy governors. Before, the governor and deputies had always voted together on rate raises, said Barclays Capital strategist Masuhisa Kobayashi. "The Bank of Japan was able to send a message about a new, more transparent Bank of Japan," Kobayashi said. Worries had been growing that prices could fall in coming months, reflecting the decline in once-soaring oil prices. Japan has been plagued for years by the danger of deflation, the downward spiraling of prices that brings down wages and deadens growth. Although consumer prices have been inching up in recent months, top government officials had warned that deflation remains a threat and urged the bank to hold off raising rates so as not to quash the recovery. Japan's core consumer price index, which excludes food, rose 0.1% in December from the same month the previous year, its seventh straight monthly rise, but the increase was less than the 0.2% gain in November. Bank of Japan Gov. Toshihiko Fukui said interest rates remain low, given Japan's solid pace of growth. "We plan to adjust interest rate levels gradually based on movements in the economy and prices," Fukui told reporters, adding that keeping an excessively easy monetary policy could harm the market and economy. In a monthly report, the Bank of Japan kept its assessment of the economy unchanged as moderately expanding — the same wording it used the previous month — noting that consumer spending remains solid and prices will be stable in the long run. The bank also left its monthly purchase of Japanese government bonds at 1.2 trillion yen ($10 billion). It promised to carefully weigh economic activity and price moves in adjusting interest rates. Kobayashi said the rate hike is part of an effort to "normalize" interest rates in Japan, where rates had been unusually low for years. "This was a good chance to raise interest rates," he said. "That's difficult to do, if the economy is sluggish." When the Bank of Japan decided to hold rates steady earlier this year, perception became widespread that the central bank had caved in to political pressure, although both sides have always said the central bank is independent. Top ruling party officials had given harsh warnings against an overly hasty rate hike ahead of the BOJ meeting in January. This time, politicians' comments had been muted. Prime Minister Shinzo Abe welcomed the bank's decision. "I think the Bank of Japan made an appropriate decision, responsibly considering overall price moves, economic conditions and risks," he said. "We would like the bank to support the economy." Copyright 2007 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.