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Last Updated: Friday, 30 June 2006, 05:32 GMT 06:32 UK
Japanese rate rise looks imminent
Japanese shopper
Prices in Japanese shops are creeping up
Falling unemployment and rising prices in the shops have pointed to an imminent end to Japan's long-held policy of zero interest rates.

The jobless rate fell to 4%, or 2.77 million, in May from 4.1% in February and is now at an eight-year low.

May's core consumer price index met market expectations with an 0.6% increase on the same period last year, its seventh consecutive monthly rise.

Analysts think the Bank of Japan could now raise interest rates next month.

The bank's next rate-setting meeting starts on 13 July.

Deflation

Rising prices are usually a signal of interest rate rises to come, but have an added significance in Japan.

Japan's economic woes during a decade from the early 1990s on were accompanied by stubborn deflation - prices falling rather than rising.

That encourages consumers to save rather than spend, since goods will be cheaper in the future, and hits businesses wanting to invest.

The zero-rate policy was an attempt to correct this effect.

Investment scandal

"With consumer prices showing a trend of mild inflation and the labour market tightening, the Bank of Japan may begin raising rates as soon as July," said Yoshikiyo Shimamine, an economist with the Dai-ichi Life Research Institute.

However, other economy watchers feel that the Bank of Japan may wait a few more months because of the recent volatility in Japanese share markets and the controversy surrounding central bank governor Toshihiko Fukui.

Mr Fukui has been criticised for his investment links to a fund manager who is under arrest and charged with insider dealing. The Bank could wait until August or September to lift interest rates, when it will be able to examine the country's second-quarter economic growth estimates.

The most recent data had the economy growing at an annualised rate of 3.1% in the first three months of 2006.


SEE ALSO
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Japan upgrades economic growth
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19 May 06 |  Business
Bank of Japan 'to raise outlook'
09 May 06 |  Business
Japan leaves rates close to zero
11 Apr 06 |  Business

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