Bank of Japan to start pivotal meeting

  • Business
  • Thursday, 13 Jul 2006

TOKYO (AP) - Japan's central bank was scheduled to start a pivotal two-day policy meeting Thursday, amid widespread expectations it will raise interest rates for the first time in six years. 

A decision is expected Friday, when the Bank of Japan's policy board members vote. Raising rates, from zero percent, would be the clearest sign yet that the world's second-biggest economy has emerged from a decade of doldrums.  

But it also raises concerns that higher borrowing costs might undercut the country's tenuous economic comeback. 

Analysts and investors largely expect the BOJ to hike rates to a scant 0.25 percent. 

But even that has sparked concern because ruling party officials want the BOJ to avoid the mistake it made in August 2000, when it lifted borrowing rates prematurely - and choked a recovery. 

But the economy is much stronger than six years ago, with corporate profits surging, salaries rising, unemployment falling to eight-year lows and the trend of spiraling price declines, known as deflation, largely defeated. 

Japan's economy has turned in five straight quarters of growth, and forecasts call for up to 3 percent growth this year. 

Raising rates would bring the BOJ in line with central banks in the U.S. and Europe, which are also tightening credit. 

In June, the European Central Bank raised its key interest rate to 2.75 percent, while the Federal Reserve has lifted the fed funds rate 17 times straight to 5.25 percent. 

Japanese government officials have given conflicting signals in the meantime. 

Top government spokesman Shinzo Abe, who has repeatedly urged the Bank of Japan to hold off until it is clear Japan has pulled out of deflation, has said earlier this week zero interest rates are "desirable'' for some time. 

However, a senior ruling party official said the government should trust the central bank with the timing of a rate hike. 

"We should trust the Bank of Japan and leave the decision up to them,'' Tsutomu Takebe, secretary-general of the ruling Liberal Democratic Party, was quoted as saying by Kyodo News agency. 

Shadowing the rate decision is a brewing scandal over private investments made by the BOJ's embattled governor, Toshikio Fukui. 

Calls for his resignation have surged since he acknowledged he had invested in a fund run by Yoshiaki Murakami, a well-known shareholder activist who was arrested on charges of insider trading last month. 

The investment wasn't illegal, but it has prompted questions about conflict of interest - and public outrage that Fukui's investment had more than doubled to 22 million yen (US$190,000; euro150,000), while most Japanese were earning virtually no interest on their savings because of the Bank of Japan's zero interest rate policy. 

Fukui has repeatedly apologized while denying any wrongdoing.  

He also has donated the entire investment to charity. 

But polls show that as many as three in four Japanese still think Fukui should step down.

For Another perspective from The Daily Yomiuri, a partner of Asia News Network, click here

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