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Bank of Japan lifts rates
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August 11, 2000: 5:03 a.m. ET
Raises target rate for first time in a decade, a sign economy is on the mend
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LONDON (CNNfn) - The Bank of Japan raised its leading short-term interest rate for the first time in a decade Friday, rebuffing government calls to maintain the "free money" policy amid signs that the once-laggardly Japanese economy has regained its footing.
The central bank boosted its short-term overnight discount rate target to one-quarter percent, abandoning its unprecedented 10-month experiment with its "zero interest rate policy" that amounted to nearly free money as a way to kick start a lagging economy. The BoJ said fears of deflation, which prompted the policy, have recently eased.
Economists had been divided about whether the BoJ would lift rates, and the currency market appeared to take the move in stride. The independent panel had been increasingly expected to hike rates amid a mounting call by central bank Governor Masaru Hayami that higher rates were needed.
"Over the past one year and a half, Japan's economy has substantially improved, due to such factors as support from macroeconomic policy, recovery of the world economy, diminishing concerns over the financial system, and technological innovation in the broad information and communications area," the BoJ said in a statement. 
"Japan's economy is showing clearer signs of recovery, and this gradual upturn, led mainly by business fixed investment, is likely to continue," said the body.
While the target of zero percent has been policy only since last year, the BoJ had been lowering rates over the last decade. The last time it raised the overnight rate was in August 1990 - by three-quarters of a percentage point to 6 percent.
The rate hike came against the will of the government of Prime Minister Yoshiro Mori, which has pushed for the BoJ to maintain the cheap money tack to cement Japan's economic recovery. Hayami said a zero-rate policy papers over the need for structural reform, hurts pensioners and destroys the market's ability to assess risk.
Shortly after the announcement, Japan's Jiji news service quoted Mori as saying he believed the hike was too premature.
In the currency market, the dollar dipped slightly to 108.52 against the Japanese yen, compared to 108.85 in late U.S. trading on Thursday.
Despite the widespread calls to hold the policy from business groups and political leaders, one economist said the rate increase isn't likely to have a deleterious effect on the world's second-largest economy and Asia's major economic engine.
"The idea of a rate hike has been on the table for a long time," said Sonia Gibbs, chief economist with Nomura International in London. "This will signal the economy is stronger, it's more of a psychological impact."
The central bank sets a target rate for overnight interest rates, but the actual rate is set in the marketplace. The BoJ adopted the term of "zero interest rate policy" last October, after a test run that began a year ago in February. At the time, the zero-rate policy drew concerns from economists because it left the BoJ with little room to maneuver any lower on rates.
The central bank said the recent collapse of the Sogo department store chain, one of the largest corporate failures ever in Japan, didn't shake confidence in the financial system. 
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Bank of Japan
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