BOJ BUSTS A MOVE

BoJ ends zero interest rate policy

Peter Alford, Tokyo correspondent 15 jul 06T

HE Bank of Japan has terminated its zero interest rate policy, marking the country's emergence from a twilight zone where bank accounts pay 0.001 per cent, a standard home mortgage rate is 2.5 per cent and apartments are worth 70 per cent less now than 20 years ago.Yesterday's decision to move the overnight call rate target, the so-called policy rate, from "effective zero" to 0.25 per cent for the first time since March 2001 underscores the central bank's confidence that Japan's long struggle with deflation is finally won.
Major retail banks greeted the news with an immediate interest lift for ordinary at-call savings bank deposits from 0.001 per cent to a princely 0.1 per cent.
Dai Ichi Life Research cautioned, however, that tangible benefits would only be felt by the rich and the debt-free elderly - the 12 per cent of households who control more than half Japan's Y728 trillion ($8.37 trillion) of bank savings and deposits.
Dai Ichi estimated the interest rate shift would add about Y557 billion annually to household incomes and cost home mortgagees an additional Y135 billion.
The yen, bond prices and the Tokyo stock market dropped yesterday and a senior analyst, Credit Suisse Securities chief economist Hiromichi Shirakawa, warned the combined effect of the Japanese tightening and US inflation news next week could roil world markets.
"We share (the BoJ's) concern, which is mainly a further downturn of equity markets globally," Mr Shirakawa said.
"Next week could be when we again see downward pressure on equity markets."
Two other uncertainties worry the Japanese markets; the timing of further rate rises and the future of BoJ governor Toshihiko Fukui, widely regarded as an important factor in Japan's stabilisation following a decade of BoJ policy failure.
"We have no intention to carry out consecutive rate rises," Mr Fukui told journalists last night. "We will adjust interest rates gradually while carefully checking the economy and prices."
However, Mr Fukui's gradualist language does not impress analysts such as Macquarie Securities Japan chief economist Richard Jerram who noted this week that so far this year the BoJ had tightened monetary conditions at the earliest opportunity and quickly. Some Tokyo market economists said yesterday the BoJ still planned to get to 1.5 per cent by March 2008 when 71-year-old Mr Fukui's term ends.
Others, such as Mr Shirakawa believe political conditions - the governing Liberal Democrat Party elects a new prime minister on September 20 - followed by worsening international conditions and a sharp downturn in the Japanese corporate profit cycle will prevent the BoJ from tightening again before mid-2007. On the second question, Mr Fukui indicated he intended to stay at the post. "I caused a fuss and worried many people, but I still have a duty to fulfil," he said. "There is no change in my intention."
The governor has been wildly assailed over his investment seven years ago in the now-notorious Murakami fund. Mr Fukui has been cleared of any illegality or conflict by a BoJ examination, but the association with alleged inside-trader Yoshiaki Murakami has made him bitterly unpopular - 72 per cent of respondents to a newspaper poll released yesterday said he should resign.