Japan Increases Interest Rates

Tokyo -- Japan's Cental Bank has increased the interest rates for the first time in six years. The rates have been increased to .25 percent from .069 percent.

However, it as a harbinger of tighter credit and uncertainity about future profits for the resurgent corporate sector.

"This is the first step toward normalization," said Masaaki Kanno, an economist with JPMorgan Securities. "It's a clear sign that now the Japanese economy is doing OK. The timing of the increase is quite good."

However, the zero percent interest policy did not mean Japanese consumers and businesses were able to get interest-free loans. Japanese banks still charged interest, albeit relatively low, with mortgage rates less than half of what they are in the U.S., but did not pay interest on deposits.

Almost immediately after the rate hike, Tokyo-Mitsubishi UFJ Bank, the world's biggest bank by assets, announced that it would also increase interest on basic savings accounts to 0.1 percent, whcih will start from Tuesday.

The move has puts Japan closer in step with the world's other big economies. In June, the European Central Bank raised its key interest rate to 2.75 percent, while the Federal Reserve has lifted its target interest rate 17 times since June 2004, to 5.25 percent.

However, several ruling party officials have urged the bank to keep rates at zero, worried that it would repeat its mistake of August 2000, when it lifted rates prematurely and choked a recovery.

But corporate profits are up, unemployment is at eight-year lows, and household spending is on the rise. The economy has turned in five straight quarters of growth, and forecasts call for up to 3 percent growth this year.

Many economists are predicting another rate hike, probably to 0.5 percent, at year's end, or perhaps in the first quarter of next year.

Bank Governor Toshihiko Fukui emphasized that the bank is acting cautiously and that the economy is on much better footing now.

"We are not embarking on so-called consecutive interest rate hikes," Mr. Fukui said at an afternoon news conference in Tokyo. "We will carefully study the state of the economy and prices to gradually adjust interest rates."