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Bank of Japan Raises Interest Rate to 0.5% in 8-1 Decision
By Mayumi Otsuma
Feb. 21 (Bloomberg) -- The Bank of Japan raised its benchmark interest rate to 0.5 percent after the world's second- biggest economy expanded at the fastest pace in three years.
Governor Toshihiko Fukui and his policy board colleagues voted 8-1 to increase the overnight lending rate from 0.25 percent, the bank said in a statement today in Tokyo. The benchmark remains the lowest among major economies.
The increase suggests policy makers are convinced rates need to rise to levels that prevent investment bubbles. Higher borrowing costs may discourage investors from borrowing in yen to buy overseas assets, the so-called carry trade that helped drive Japan's currency to a 21-year low against its trading partners.
The Bank of Japan is concerned that the longer it keeps rates so low ``the more it fuels the risk of overstimulating investment and growth,'' said Teizo Taya, who served on the bank's policy board until Dec. 2004 and now advises Daiwa Research Institute.
Japan's economy expanded at an annual 4.8 percent pace in the three months ended Dec. 31, up from 0.3 percent in the previous three months, a government report showed last week. Consumer spending rose 1.1 percent, after dropping at the same rate in the third quarter. Business investment expanded 2.2 percent, up from 0.8 percent.
Fukui cited weak consumer spending and slow price growth as reasons for keeping rates on hold at the bank's December and January meetings. The bank last raised rates in July. Three board members proposed a rate increase in January, dissenting from the 6-3 majority decision.
Japan's Deflation
Bank of Japan policy makers have said since at least October 2005 that rates should be gradually raised from near zero percent, where until July they were held for more than five years to help beat the deflation that plagued Japan for almost a decade.
Fukui said in a November speech that the bank is committed to avoiding a repeat of the ``bubble'' economy, which burst in the early 1990s and triggered a property and stock market collapse that heralded a decade of economic stagnation.
Today's decision was considered a close call by analysts. Twenty-seven of 52 economists predicted rates would be left at 0.25 percent. Some said the fourth-quarter gross domestic production figures were merely a rebound from the slowest growth in almost two years and cited concern that consumer prices may drop in coming months.
``Fluctuations in individual economic indicators don't affect the judgment of Governor Fukui and the board members who are seeking a rate hike,'' said Ryutaro Kono, chief economist at BNP Paribas Securities Japan Ltd.
Nikkei Stock Average
The Nikkei 225 Stock Average rose more than 3 percent since the bank's Jan. 18 board meeting on expectations growth in Japan and overseas will be sustained. The index climbed to the highest in almost seven years this week.
The U.S. economy, destination for more than a fifth of Japanese exports, accelerated to an annual 3.5 percent pace in the fourth quarter, the fastest in a year.
Japan's major companies plan to spend on factories and equipment at the fastest pace since 1990 this fiscal year, the bank's Tankan business survey showed in December. Companies aim to increase investment in land by 11 percent to build new factories, warehouses and offices, the survey showed.
Some Bank of Japan policy makers may have been reluctant to increase rates because of the nation's slow price growth.
Core consumer prices, which exclude fresh food, rose 0.1 percent in December, slowing from 0.2 percent in November. Core prices may fall as early as March because of cheaper oil, said Takehiro Sato, chief economist for Japan at Morgan Stanley.
Opposition Muted
Fukui has said cheaper oil would benefit the economy by reducing energy costs.
Government opposition was relatively muted in the lead up to this week's meeting, in contrast with comments before the Jan. 18 decision that fanned suspicions the bank caved in to political pressure.
Hidenao Nakagawa, secretary general of the Liberal Democratic Party, declined to comment on monetary policy yesterday and on Feb. 19. Nakagawa last month said the governm
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Was de laatste renteverhoging niet in mei 2006? Met een correctie van jewelste voor de Nikkei!!!