BoJ joins rate war

13 July 2006

The Bank of Japan's crucial two-day policy meeting got under way amid widespread expectation of a hike in interest rates for the first time in six years.

BoJ board members are expected to vote on a policy decision raising the interest floor from zero per cent on Friday. Analysts and investors expect the BoJ to raise the base interest rate from the current 0.069 per cent to 0.25 per cent.

With investors averse to booking returns in the stock market, Japanese banks were saddled with zero-return deposits and much of the country's savings have been sitting idle for the past six years.

The zero rates benefited Japanese banks because they charged relatively low interest on loans. And, in June this year, Japanese bank lending grew at its fastest in over a decade.

Ahead of the BoJ move, individuals and small businesses were reported to be running to banks to access loans cheaper. Government officials and business leaders have also voiced concern about the looming rate hike.

They fear a tightening the taps too soon could stymie the country's nascent economic recovery.

The hike in borrowing costs is one clear sign of Japan – the world's second-largest economy – staging a comeback. A 0.25 per cent interest rate may not raise borrowing costs much and may not undercut the country's climb-back.

Japanese economy is much stronger than six years ago, with corporate profits gaining, salaries rising, unemployment at eight-year lows and the trend of deflation largely defeated.