The Bank of Japan (B.O.J.), in a move widely anticipated, has raised short-term interest rates from near zero to one-quarter of one percent, although the bank's governors said they expected rates to remain very low for some time.
Japan's overnight call lending rate will now be 0.25 percent, up from virtually zero. That may not seem like a lot, but it is big shift away from the deflationary mentality of the past 15 years while Japan's economy slumped.
The head of the Bank of Japan, Toshiko Fukui, told reporters Friday this is the first step in a gradual adjustment of interest rates. But Fukui, in a remark designed to calm world stock markets, says he and his fellow governors do not intend to carry out consecutive rate hikes.
In a statement, the B.O.J. governors said they expected "very low interest rates" would be maintained for some time.
The bank also raised the official discount rate to four-tenths of one percent from 0.1 percent.
Japan's benchmark stock index, the Nikkei, on Friday fell 1.23 percent, the fourth straight day of losses. Analysts say the rate move did not boost shares because players had expected it and were nervous because of record high prices for crude oil.
The yen also weakened following the central bank's decision.
The increase signals that the B.O.J. thinks Japan's economy is finally on a sustainable recovery, long after the so-called "bubble economy" in the 1980's collapsed.
The B.O.J. has held rates near zero since the late 1990's, to fight falling prices and to help banks burdened with massive bad loans.
Recent data show that Japan's economic growth is accelerating, but consumer spending remains lackluster.
The interest rate increase comes despite concern that the Japanese economy is not yet strong enough and could easily slump again, especially if the U.S. economy slows.
But a former central bank official, Hiromichi Shirakawa, who is now an executive at Credit Suisse Securities, says some politicians are cheering the B.O.J decision, because of national elections expected in September.
"They're thinking of campaigning to small depositors that 'you're money will get some interest.' Even demand deposits would have some interest rates," said Shirakawa.
The world's biggest bank in terms of assets, Tokyo Mitsubishi-UFJ, raised interest rates for ordinary deposits immediately after the B.O.J. move.
Martin Schulz is an economist at the Fujitsu Research Institute, an economic research and consulting firm in Tokyo. He predicts rising rates at home will prompt Japanese to move more of their savings back into yen - bad news for bankers from Auckland to Bombay.
Japanese investors for years have moved money overseas seeking better interest rates - which raised asset prices in many countries.
"You have seen the enormous peak the New Zealand dollar, for example, had. You know about Indian investment being advertised at basically every bank branch in Japan right now," said Schulz. "When we have a more attractive picture in Japan, Japanese investors might invest more in Japan. That would have an impact on more yen return or not leaving the country."
That could strengthen the yen considerably - which would be welcome in many countries, where there is grumbling that the yen is undervalued.