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Last Updated: Friday, 14 July 2006, 04:39 GMT 05:39 UK
Q&A: Japanese interest rates

The Bank of Japan has abandoned the country's zero interest rate policy after more than five years.

Rates have been set at 0.25% but not everyone is happy with the decision.


Why has Japan had zero interest rates?

Japan's monetary policy of zero interest rates was introduced in March 2001 in an attempt to revive the economy, which had been in long-term recession since the early 1990s.

Japanese woman drinking coffee in Tokyo
Japan's consumers are again getting a taste for spending

One of the main problems was deflation - falling prices - which meant that consumers and businesses were reluctant to spend or invest because any purchase was likely to be cheaper in the future.

The zero interest rate was designed to make it cheaper for consumers and companies to borrow money for spending, and less attractive for them to save.

What is prompting the decision to increase the rate?

Japan has been wrestling with more than a decade of slow growth and recession that has hit companies and consumers alike but now its economy has been gaining momentum.

It grew 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%.

There is a feeling that the economy is now strong enough to cope with interest rates going up.

Why is this considered a significant step?

It signals Japan's confidence in the strength of its economy, which has seen accelerating growth and falling unemployment.

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

Is the decision unanimously supported by the Japanese government?

In a word, no.

The decision was made by the Bank of Japan - an independent body.

There is great nervousness among Japanese ministers who are concerned because the last time zero rates were abandoned, in 2000, this led to a prolonged economic downturn.

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

He, like others, is concerned that it could stop the country's resurgent economy in its tracks.

So what now?

Economists say that another rise is unlikely until October at the earliest - and only if it does not appear to be having negative effects on the economy

However, in the past year there have been increasing signs the economy has pulled itself out of its trough.




SEE ALSO
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Minister backs Bank of Japan boss
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Japan upgrades economic growth
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Japanese prices continue to rise
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