The Bank of Japan will probably raise interest rates for the first time in almost six years this week as the world's second-biggest economy emerges from a decade-long battle with deflation.
Governor Toshihiko Fukui and his policy-board colleagues will increase the key overnight rate between banks by 0.25 percentage point on July 14, according to all 16 economists surveyed by Bloomberg News.
Japanese companies including Matsushita Electric Industrial Co. have completed the job cuts, factory closures and debt reorganization that followed the bursting of the bubble economy in the early 1990s and now plan to increase investment at the fastest pace in 16 years. Fukui said last month he's concerned that prolonging the zero-rate policy could promote unnecessary investment and kindle inflation.
"The ending of zero rates will be testament that Japan's long struggle with excess is now over and that the economic cycle is back to normal,'' said Glenn Maguire, chief Asia economist at Societe Generale in Hong Kong. ``We look for the economy to enter a sweet spot as it fully transits from deflation to inflation.''
Sixteen central banks raised interest rates in June, including the U.S. Federal Reserve, the European Central Bank and those of South Korea and India.
Japan's largest companies plan to increase investment this year at the fastest pace since 1990, the Bank of Japan's Tankan business confidence survey showed last week.
Consumer Prices
Matsushita, the world's-biggest consumer electronics maker, is building the world's biggest plasma display factory to increase production. Honda Motor Co. said in May it would build its first car plant in Japan in 30 years.
Other evidence supports the bank's contention that economic growth will be sustained as companies divert rising profit to expansion rather than debt repayment.
Japan's consumer prices rose for a seventh month in May when the unemployment rate fell to an eight-year low of 4 percent, and in June bank lending climbed the most in a decade, recent reports showed.
"Companies are cranking up spending plans and it's hard to anticipate that momentum will slow any time soon,'' said Akio Makabe, professor of economics at Shinshu University. ``A recovery of the job market will help boost household spending.''
The yen rose to a four-week high this week on speculation an interest-rate increase will lure investors to yen-denominated assets. The Nikkei 225 Stock Average has rebounded more than 8 percent since June 13, when it set a seven-month low amid concern a spate of global interest-rate increases would stunt world economic growth.
Business Support
The government's opposition to an interest-rate increase has eased. The Cabinet Office on July 7 said the gross domestic production deflator, a broad measure of price changes in the economy, will turn positive in 2006 for the first year in eight.
Prime Minister Junichiro Koizumi on July 4 said the bank should make its own decision on interest rates, dropping previous calls for the bank to act cautiously.
The government opposed the bank's last rate increase in August 2000. Seven months later, the bank had to cut rates back to near zero as an Internet-led global economic boom faltered, allowing the government to accuse it of making a policy mistake.
Businesses are getting used to the idea of higher borrowing costs. Only 3.6 percent of companies polled by the Mainichi Newspaper said they consider a rate increase this week would be too soon, according to a July 9 poll, and 89.9 percent said a rate increase would be acceptable as long as the bank exercised appropriate judgment.
Second Rate Increase
"The necessary economic conditions mentioned by the Bank of Japan for a rate hike are taking shape,'' Fujio Mitarai, head of the Japan Business Federation and chairman of Canon Inc., said on July 10.
The central bank will keep rates low even after a first rate increase because the pace of economic expansion will slow next year and inflation will be subdued, economists said.
Nine of the 15 surveyed economists said the bank won't make an additional increase this year. Eight said the key rate will be capped at 0.75 percent or below by the end of next year.
"The Bank of Japan will likely attempt a second rate hike this year, but there is no guarantee that upcoming economic data will justify such a move,'' said Teizo Taya, advisor to the Daiwa Institute of Research and a former central bank policy board member.
The bank will this week also raise its discount rate, with which it makes overnight loans directly to financial institutions, and cap a gain in the interbank overnight loan rate to between 0.4 percent and 0.5 percent from 0.1 percent, the surveyed economists said.
Source: Bloomberg
