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Last Updated: Thursday, 13 July 2006, 07:00 GMT 08:00 UK
Key Japanese rate decision looms
Japanese men cycle past an electronic board showing share prices
The Japanese economy has been gaining momentum
Japan's central bank has begun a crucial two-day meeting in which it is expected to raise interest rates for the first time in six years.

The move - widely anticipated to be a quarter point rise from 0% to 0.25% - is expected to be announced on Friday.

The move would signal its confidence in the strength of the Japanese economy, which has seen accelerating growth and falling unemployment.

It would also mark a shift in monetary policy, away from tackling deflation.

Economic revival

Consumer price rises, allied to strong economic performance, have indicated Japan is moving out of the deflationary spiral of recent years.

However, the Japanese government has warned the Bank of Japan against any precipitous move on rates, concerned that it could stop the country's resurgent economy in its tracks.

The market is currently expecting the next rate hike to come, at the earliest, in October
Takehiro Sato, Morgan Stanley

The economy has grown in each of the past five quarters while unemployment has fallen to an eight-year low of 4%.

The government recently upgraded its annual growth forecast for the current year to more than 2%.

Economists said the tone of the bank's remarks on the economic picture would be crucial to anticipating the future direction of rates.

"The market is currently expecting the next rate hike (after Friday's), to come, at the earliest, in October," Takehiro Sato, an economist with Morgan Stanley, told the Agence France Presse news agency.

But he added: "We do not expect anything on Friday that would reinforce this view."

Government concerns

Interest rates have been rising across the industrialised world, with the US Federal Reserve and the European Central Bank both acting in recent months to contain inflationary pressures.

But Japanese ministers are nervous after what was seen as premature rate rise in 2000 led to an prolonged economic downturn.

Finance minister Sadakazu Tanigaki has said repeatedly that he does not believe the time is right for a rise in rates.

Japan raises annual growth target
07 Jul 06 |  Business
Mixed message on Japanese rates
04 Jul 06 |  Business
Japan's firms grow in confidence
03 Jul 06 |  Business

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