Japan raises interest rates

After ending a multi-year zero-interest rate policy in July 2006, Japan raised interest rates again in February, 25 basis points to 0.50 percent.

The Bank of Japan (BOJ), citing economic data that came in stronger than expected, voted 8-1 to raise rates to an almost-nine-year high. Japanese economists had expected a rate raise in 2007, but were unsure when it would happen.

A week before the interest-rate change, Japan announced better-than-expected fourth-quarter GDP growth of 4.8 percent, the highest rate in almost three years. The BOJ determined the economic expansion would continue, with consumer spending and prices improving.

Speaking to parliament two days after the rate hike, BOJ governor Toshihiko Fukui said interest rates would be raised gradually to help prolong stable economic growth. Fukui added that interest rates of 0.5 percent are low, considering the Japanese economy grew at a 2-percent clip in 2006.

The yen reacted to the news by selling off against the U.S. dollar for two days before leveling off on Feb. 23. The Nikkei 225, Japan’s benchmark stock index, reacted favorably to the news, opening at 17,896.60 on Feb. 21 and closing at 18,188.42 — a gain of more than 1.5 percent — on Feb. 23.