BOJ rates reach decade-high 0.5 pc POSTED: 0640 GMT (1440 HKT), February 21, 2007 http://edition.cnn.com/2007/BUSINESS/02/21/japan.interest.rates.reut/index.html TOKYO, Japan (Reuters) -- The Bank of Japan raised its main interest rate on Wednesday by a quarter percentage point to 0.50 percent, the highest in more than a decade, but signs the central bank will be cautious about further increases sent the yen lower. The BOJ, whose board members voted overwhelmingly for the rise, said the economy was likely to continue growing and that it would make further rate adjustments only gradually. That was enough to spook yen investors and lead to wild swings in the foreign exchange market. "It reduces the likelihood of further rate hikes going forward," said Glenn Maguire, chief economist at SG Hong Kong. "It will be difficult to do anything before the second half of this year." In pushing up the cost of money, at a time when many politicians have expressed concern about the Japanese economy, the central bank has underlined its independence. But, ironically, that could be a bad omen for the yen. Analysts believe the BOJ's hawkish stance now might influence the Japanese government when it nominates future board members. "By moving against the government's clear stance on interest rates, the likelihood is that more dovish members will be nominated to the board." Only one member of the central bank's nine-member board voted against the move. The market had been divided over whether the BOJ would move to head off the economic risks that arise from having ultra-cheap money rates for too long. The argument for raising rates was bolstered by data last week showing the economy growing faster than expected, although consumption and price pressures remain subdued. The rise marks the third major policy move in less than a year. Last March, the BOJ ended its so-called quantitative easing policy of pumping excess money into the banking system. In July it followed up with a rate rise to 0.25 percent from virtually zero, the first rate increase in six years. Early market moves The market was jolted ahead of the decision as Japanese media reported that BOJ chief Toshihiko Fukui had proposed a rate increase. The dollar lost half a yen immediately after the media reports as investors snapped up the Japanese currency in expectation of a rate rise. The dollar lost even more just after the news was confirmed before it shot higher and erased all of the yen's gains. At 0200 GMT, the dollar was at 120.25 yen, up from a 119.73 low reached just after the rate decision. Japan's interest rates, despite Wednesday's move, are still well below benchmark rates in the United States, at 5.25 percent, or the euro zone, at 3.5 percent. The wide gap in rates has encouraged investors to sell yen in recent months in favor of the dollar or euro. The yen this month hit record lows against the euro and approached four-year lows against the dollar. In January, the yen fell to a 21-year low on a traded-weighted and inflation-adjusted basis. Japan's economy is now in its longest post-war growth period, although it is expanding at a slower pace than in previous economic recoveries. Data last week showed Japan's growth accelerated to an annualized 4.8 percent in October-December from 0.3 percent in the previous quarter, thanks to a rise in personal consumption. But there has been scant evidence of inflation after seven years of debilitating deflation. The core consumer price index, which excludes volatile fresh food prices, in December was just 0.1 percent higher than a year earlier. Political deliberations Mixed economic signals in recent months have made many politicians nervous that the current expansion -- despite its longevity -- could peter out, just as so many other recoveries have since the early 1990s. Under BOJ law enacted in 1998, government representatives can attend policy-setting meetings. They cannot vote but they can request a delay to any policy decision until the next meeting. The central bank is not obliged to heed such requests. In January, a senior ruling party lawmaker called on the government to request a delay in the event of any BOJ rate increase vote. That stirred market talk that last month's rate decision might have been politically influenced. This month ruling party politicians have been noticeably less vocal about what they believe the BOJ should do. Some analysts think they are wary of provoking a backlash ahead of an election for parliament's upper house in July. In the past three months, the BOJ had become increasingly hawkish. In January, the BOJ board voted 6-3 to leave the overnight call rate target at 0.25 percent, the closest vote in more than three years and a marked shift from a 9-0 vote for steady rates at a December meeting. --

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