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Last Updated: Thursday, 9 March 2006, 08:49 GMT
Japan tightens monetary strategy
Japanese car plant
Japanese output has improved
The Bank of Japan has signalled an end to its longstanding monetary policy of holding interest rates close to zero.

The tightening of policy was announced at the end of a two-day bank meeting.

Economists have interpreted the change in direction - which follows an upturn in Japan's economy - as a sign that interest rates will soon rise.

But the Bank of Japan said rates would remain near zero for some time yet. Its previous "ultra-loose" policy was put in place to combat falling prices.

Changing direction

Japanese markets responded positively, with the Nikkei-225 index closing up 2.6%, or 409.42 points, at 16,036.91.

The move reflects the steady improvement in Japanese output, which is expected to lead to price growth and stronger inflation.

There will be no abrupt change as a result of today's policy decision
Bank of Japan

Nevertheless, the Bank said the transition away from its previous policy would be a gradual one and that it would aim to keep inflation below 2%.

In a statement, the Bank said economic conditions had changed for the better since it established the previous monetary strategy in 2001.

Exports had increased, consumer spending had improved and companies' profits had risen, allowing firms to raise investment.

"Looking ahead, the Bank expects a sustained recovery," it said.

'Splendid job'

Sustained growth could be achieved by ensuring long-term inflation levels remained between 0% and 2%, the Bank said.

Although it foresaw a "gradual adjustment" in interest rates in light of rising prices, the Bank said there would be no dramatic rises.

The market had expected an end to the policy, but the Bank still left interest rate rises open to interpretation
Yasuhide Yajima, NLI Research Institute

Japan has seen a prolonged period of deflation since the 1990s, as its economy has endured years of stagnation and intermittent recession.

If price stability was maintained while inflation was brought in-line with other major economies, analysts said the outcome would be positive.

"The Bank did a splendid job," said Yasuhide Yajima, senior economist at NLI Research Institute in Tokyo.

"The market had expected an end to the policy, but the Bank still left interest rate rises open to interpretation."

How the changes might impact the Japanese economy

Bank of Japan meets on deflation
08 Mar 06 |  Business
Japan ponders post-deflation plan
27 Feb 06 |  Business
Fresh boost for Japanese economy
13 Feb 06 |  Business

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