Japan's Monetary Policy Appears On Course
On the heels of a 4.8% boost in fourth-quarter GNP, on February 21 the BOJ raised its benchmark interest rate to 0.5%. The move was a little surprising to economists, the majority of whom thought the Bank would keep rates steady. At its January meeting, the BOJ had done just that -- and was promptly accused by some of bowing to political pressure.

Viewed over a longer time-frame, however, monetary policy appears on course. From March 2001 to March 2006, the BOJ maintained its so-called monetary easing policy. Instituted to combat deflation, the policy also helped to maintain stability in the financial system and get the big banks back on a sound financial footing. Although some now criticize the BOJ for allowing the yen to weaken, thus prolonging and deepening the yen "carry trade," a precipitous rise in rates would do more harm. The strength of consumer spending remains questionable, with the increase in the latest quarter merely offset weakness in the previous period. After 15 years of declining asset values and widening cracks in the Japanese lifetime employment system, who can blame the Japanese consumer for being wary of pronouncements of economic recovery?

The BOJ policy seems attuned to this sentiment, and the broader requirements of Japan's economic health. At least so far as the recent hike is concerned, executives at Japan's big companies seem to agree: according to a Nikkei survey, 60% of them thought it was an "appropriate time" for such a hike.