Bank of Japan to Raise Interest Rates for First Time in 10 Years
DAVID HAFFENREFFER, CNN ANCHOR: Well, just a few moments ago, the Bank of Japan decided to raise interest rates for the very first time in 10 years.</s>DEBORAH MARCHINI, CNN ANCHOR: Andrew Stevens has been following the story from our studios in Hong Kong, and joins us now live. Hello, Andrew.</s>ANDREW STEVENS, CNN CORRESPONDENT: Hello, Deborah. Well, certainly, a day of high drama in Japan today. And the Bank of Japan winning a very high stakes game against the government over whether or not to raise interest rates. The Bank of Japan, as we know, about 20 minutes ago, half an hour ago, said they would raise the overnight call rate by about 25 basis points. The markets had been factoring this sort of rise in. But it certainly is a major victory for the Bank of Japan Governor Hayami, who has been saying quite stridently for the past three or four weeks, that it is time to end this interest rate policy, zero interest rate policy. The -- it was imposed in February last year because it reflected the emergency conditions in the economy. That has since improved quite dramatically. If I can just quote to you a line from the text from the Bank of Japan saying over the past 1 1/2 years, Japan's economy has "substantially improved." And one of the key points here is that the Bank of Japan had been very worried about deflation. They're saying that the signs of deflation are now receding and this is a very key reason why they can now raise interest rates, saying at present, Japan's economy, I'm quoting this: "Japan's economy is showing clearer signs of recovery and that this gradual upturn, which is led by business fixed investment, is likely to continue. And under the circumstances, the downward pressure on prices, stemming from weak demand, has markedly receded.? So the Bank of Japan being quite bullish, if you like, on the fact that deflation is moving out of the system, that there is no longer an emergency in the Japanese economy, and therefore it's time to raise rates against, very much, the wishes of the government. As I said, in fact, just before that announcement came out, there was word that the government had actually asked the Bank of Japan to delay that decision for a month, which would have effectively meant leaving rates unchanged for the month. The government has been saying all along, it's just too early. They just don't know whether the economy can sustain it. So Governor Hayami out on a limb, but certainly confident in his assessment so far.</s>HAFFENREFFER: Andrew, the reviews on the wire services, so far, have been somewhat mixed. I guess the fear being here, that this early an interest rate increase could hamper the momentum that the Japanese economy has begun to build. Is that a fear that you're hearing about? Obviously, the timing of this is what is important.</s>STEVENS: Indeed, David, well, certainly that's what the government has been playing on. And speaking to individual economists, you do get a very mixed reaction. Some saying it's better to play it safe, the fact that you could leave it another month to get a clearer picture of the economy. Some very big numbers coming out. I think it's on September the eight, which is the second quarter GDP numbers, which will give, obviously, a very good snapshot of what's happening in the economy. So there is a certain amount of fear, but, as I was saying before, it's a deflationary story in it was really an emergency situation which brought the Bank of Japan to impose that policy in February last year. And those emergency conditions no longer exist. And if you speak to most economists, they would agree with that. Now the question is, is the economy strong enough to sustain it? And if you look at the Economic Planning Agency today, which is a government economic think-tank, if you like, they were actually saying that, as far as the economy is concerned, yes, it could sustain it. It's a sentiment story. If the markets take it negatively, if there's a drop in sentiment, that is where the rub is going to be, that is where you could see the economy start spiraling down again.</s>MARCHINI: Even though this action was somewhat expected, Andrew, Japanese stocks closed up nearly one percent. How are people thinking this rate hike is likely to effect capital flows into or out of Japan and into or out of the United States?</s>STEVENS: Well, to be honest, Deborah, I mean, it has been factored in. I think what we have seen over the past two weeks, this ongoing spat between the Bank of Japan and the government, which was also over an independence issue as well. So both were backed into a corner. The Bank of Japan had the problem that if it didn't raise interest rates, that its independence from the -- or the credibility of its independence would be actually tarnished. So the markets have been factoring a rate rise in. Most people have been expecting 25 basis points. As you said, the Nikkei was up about one percent today. So, as far as capital flows go, not expected to be a lot of damage done there. Also important to point out that the Bank of Japan has been making it quite clear that this really is a one-off step, moving it away from these emergency conditions I keep talking about. It's not the start of an interest rate cycle as yet, or so far that we can see. And certainly there would need to be quite a lot more evidence to suggest that the economy is strengthening quite rapidly.</s>HAFFENREFFER: All right, Andrew Stevens, in our bureau in Hong Kong, we'll check back in with you a little bit later on this morning, talk a little more about this breaking news story.