TOKYO (AP): For five years, the Bank of Japan has kept interest rates at zero and flooded the banking system with trillions of yen -- all to encourage lending and spur a recovery in this long-stagnant economy.
That ultra-easy monetary policy may be coming to an end as early as this week after figures released Friday showed that January's consumer prices rose for the third straight month -- the first time that's happened since 1998 and a sign Japan's economy is on the mend.
But don't expect the central bank, whose policy planners meet Wednesday and Thursday, to raise interest rates any time soon.
If the Bank of Japan makes a move, it will most likely come in the form of a vague announcement about switching policy, which will have the effect of gradually reducing the excess cash in the banking system over several months, economists say.
If all goes well, interest rate increases will likely follow several months later.
Government officials have urged the central bank to go slow, and some analysts don't expect any tightening until April.
But others say the central bank needs to act amid signs of a budding economic recovery. In the fourth quarter, Japan's economy grew at a robust 5.5 percent pace.
"If the bank doesn't act, it may lose credibility,'' says Takafumi Shinomiya, senior economist at Mizuho Research Institute. "It must send a message about the future direction of its monetary policy.''
Bank of Japan officials have made it clear they won't shift policy until there's ample evidence that the economy has exited deflation. Prices have been falling for about seven years, dragging on economic growth.
Friday's figures showed that the core consumer price index rose 0.5 percent in January from a year ago, the biggest gain since March 1998. In November and December, the core CPI rose 0.1 percent.
The shift to tighter monetary policy will require a delicate balancing act, experts say, to maintain stability on the market, keep price fluctuations in check and encourage healthy growth.
Moving too drastically could torpedo the still-delicate recovery. But procrastination could be dangerous and even set off inflation, economists say.
Politics, too, is part of the picture. Although the BOJ is supposed to be independent, top politicians tend to wield considerable influence.
Japan's economy minister, Kaoru Yosano, who has hinted recently that the Bank of Japan won't face much government opposition if it decides to change policy, reiterated Friday that Japan was no longer in a "deflation spiral,'' although "very mild deflation'' remained.
"I hope they make a responsible decision,'' he said.
Investors are bracing for a move _ and anxious about the uncertainty of when it will come. Friday's CPI figures sent the Nikkei 225 index down 1.55 percent to 15,663.34 points.
Still, while sectors like real estate may suffer from the BOJ's shift to tighten credit, most companies won't likely be hurt too badly even by gradual gains in interest rates down the road, economists say.
"If management can't deal with such low interest rates, they wouldn't have survived the slowdown,'' said Kazuo Mizuno, chief economist for Mitsubishi UFJ Securities Co.
With interest rates at zero the last five years, Japan's central bank has had to resort to a policy known as "quantitative easing'' -- flooding the financial system with excess cash to encourage lending.
It has targeted between 30 trillion yen (US$258 billion; euro216 billion) and 35 trillion yen (US$301 billion; euro252 billion) in its account kept for commercial banks.
When it's time to make a move, experts say it's likely the bank won't announce a lower target but will simply say it's ending quantitative easing. It may take a few months for the extra money to dwindle to levels considered normal at 6 trillion yen (US$52; euro43 billion) or 7 trillion yen (US$60; euro50), they say.
The transition will allow the Bank of Japan to be more like other central banks that use interest rates to manipulate monetary policy.
For nearly two years, the U.S. Federal Reserve has been boosting interest rates to curb inflation, leaving a key interest rate at 4.5 percent, the highest in almost five years.
Last week, the European Central Bank raised its key interest rate by a quarter point to 2.5 percent, saying it expected faster economic growth in the euro zone but had not committed itself to a string of future rate increases.
Bank of Japan Gov. Toshihiko Fukui has said a decision on quantitative easing will take into account the larger economic recovery.
Other indicators released Friday weren't as positive, such as the unemployment rate rising to 4.5 percent in January from 4.4 percent in December. Also, household spending dropped 4.7 percent in January from a year earlier.
A report by Lehman Brothers said the rise in the consumer price index may be due to special factors such as higher utility fees caused by soaring oil prices and predicted a decision was more likely at the April 10-11 board meeting.
"We judge it likely that the Bank of Japan will give a heads-up one meeting ahead that the decision is coming at the next meeting,'' the report said.