Bank of Japan raises key interest rates

Bank of Japan (BOJ) on 21st February 2007, raised interest rates by a quarter percentage point to 0.5 percent. The target for the unsecured overnight call rate, which the BOJ uses as the key target rate in the short-term money market, was increased to 0.5 percent from 0.25 percent. It is the first time since September 1998 that the key policy rate has been at 0.5 percent or higher.

The BOJ has also decided to increase the official discount rate, which effectively serves as the cap on the overnight interbank rate because the BOJ provides loans to banks at the rate, to 0.75 percent from 0.4 percent per annum.

The bank says Japan's economy looks set to continue moderate expansion, with production, income and spending in place. Figures out last week showed strong economic growth in the December quarter of last year, further suggesting Japan has overcome more than a decade of economic stagnation. Japan's GDP grew at a stronger-than-expected annual pace of 4.8 percent in real terms, or after adjustment for inflation, in the October-December quarter, the fastest pace in nearly three years and a significant increase from 0.3 percent in the preceding quarter.

The rate hikes are the first since July 2006, when BOJ ended its zero-interest policy of nearly six years. At that time the BOJ raised its target for the unsecured overnight call rate to 0.25 percent from effectively zero and the official discount rate to 0.4 percent from 0.1 percent per annum.

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