Japan inches towards end of zero interest rate policy

The Bank of Japan yesterday gave a strong hint it was on the brink of abandoning the super-easy monetary policy stance it has run for the past four years in the face of mounting evidence of an economic rebound.

The Bank's Governor, Toshihiko Fukui, said the debate over ending its policy of pumping cash into the economy and keeping interest rates at zero had reached a "critical period".

He was speaking after two members of the Bank's nine-strong policy board voted against its decision to continue flooding the economy with cheap money.

"Changing the framework should not be too early or too late," Mr Fukui said after the decision.

"We are entering a critical period for making a decision."His comments were the latest in a series of public comments from board members hinting at the possibility of an end to the policy of "quantitative easing" - making more money available than is strictly needed in the hope it stimulates demand.

There is also mounting speculation that the Bank might order its first rise in interest rates since 2000 as soon as next year once the return of inflation is cemented.

"The policy debate has really started to rise up over the last month," Simon Derrick, the vice president of global markets at the Bank of New York in London, said.

"Certainly the end of quantitative easing looks likely in the next five months and I think that there's quite a reasonable chance that we could see a quarter- or half-point [rate rise] in the second quarter of next year."His view was in line with a poll of 46 economists and traders by Reuters last week, which showed that they expected the Bank to end the policy in April to June next year but keep interest rates at zero before raising them in the second half.

But some analysts are fearful the Bank will repeat its mistake of 2000 under the previous governor when it prematurely raised rates while the economy was still suffering from deflation.

At its annual meeting last month the International Monetary Fund sent a strongly worded message that a move now would be a mistake.

"Until deflation is decisively beaten, it is important the Bank of Japan maintain its very accommodative policy stance," it said in its world economic outlook.

"A premature end to the existing quantitative easing framework would endangerthe progress that has beenmade in tackling deflation in recent years."While the labour market, export sales and machinery orders have been unequivocally strong, inflation is still negative and consumer spending has weakened sharply in recent months.

Graham Turner, at GfC Economics, said markets were worried the Bank was abandoning the three-stage test for ending the easing policy it set out two years ago.

In 2003, it said core inflation should be above inflation for a few months, the Bank should be convinced it would not fall back to less than zero and also be sure the economic recovery was self-sustaining without extra liquidity.

However, last week Mr Fukui said the end of the policy would "become more likely towards [the start of] fiscal 2006", adding that could be interpreted as "before or several months after the start of that fiscal year".

Mr Turner said: "Setting out a time limit is unhelpful.

Signalling an end to quantitative easing before all three policy-framework requirements have been fulfilled sends the wrong message."

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