March 10, 2006	Friday	Safar 9, 1427

TOKYO, March 9: The Bank of Japan ended its historic deflation-fighting monetary policy Thursday as the economy roars ahead but signalled it was in no rush to hike rock-bottom interest rates yet.

By ending five years of flooding the banking system with cash, the central bank has returned to a conventional monetary policy and taken a first step towards raising borrowing costs.

Investors were heartened by the Bank of Japan’s pledge to keep short-term interest rates effectively at zero per cent for some time yet and to introduce a goal of keeping inflation between zero and two per cent.

Over a certain period of time interest rates will stay at around zero per cent, then rates will adjust gradually, in accordance with the condition of the economy and prices, said BoJ Governor Toshihiko Fukui.

If inflation remains subdued, then a loose financial environment is likely to continue with very low interest rates, he told reporters.

Financial markets welcomed the clear guidance from the central bank and took the view that the world’s number two economy will continue on its recovery despite a tightening of the cash tap.

I think it’s a big step forward, said Robert Feldman, chief economist for Japan at Morgan Stanley.

The Bank of Japan made a lot more progress toward putting in place a new framework for monetary policy, he said, adding that many of the new measures were in the vanguard of central bank practices.

Since 2001 Japan’s central bankers have been swamping the financial market with virtually free money, a highly unorthodox policy introduced to try to haul the economy out of a deflationary spiral.

It will now gradually drain the excess liquidity from the banking system and return to focusing on interest rates like the central banks in the United States and Europe.

The policy even won approval from the government, which had been pressing the Bank of Japan not to act too hastily amid fears a move could put the brakes on the economic recovery.

I respect the decision as it was made after full discussions at the policy board, Prime Minister Junichiro Koizumi told reporters.

Koizumi added that he regarded the new inflation goal as the BoJ’s message that it is going to work with the government to shake off deflation.

The policy being scrapped, known as “quantitative easing”, is highly unusual and complex, and even most Japanese are confused about what it means.

I have no idea what it is, admitted 66-year-old Yoshiko Nakamura, out shopping in central Tokyo, when asked what she thought of the end to quantitative easing.

I don’t think it has anything to do with my life, she added.

The Japanese currency fell back on news of the widely expected policy shift initially in what dealers said was a typical ‘buy the rumour, sell the fact’ reaction.—AFP