Interest Hike Fails to Stem Decline of Yen : Dollar Gains in Wake of Move by Bank of Japan

The Bank of Japan today raised its central discount rate by 0.75% to 3.25%. It was the first such increase in nine years and signaled the end of an era of super-low interest rates but not the end of the dollar’s rise against the yen.

For the second straight trading day after word of the rate increase was leaked to the Japanese press Friday, the dollar moved up today on the Tokyo Foreign Exchange Market, gaining 0.22 yen to close at 143.10. On Monday, the dollar had gained 2.48 points, or nearly 2%.

Satoshi Sumita, governor of the central bank, described the interest rate increase as a move designed to nip inflation in the bud.

Lowest Ever in Japan

Since February, 1987, the central discount rate, which the bank charges on loans to commercial banks, had been 2.5%, the lowest ever in Japan and the lowest among advanced Western nations.

Increases in the relative value of the dollar have forced Japanese to pay more in yen for imports, driving up prices of oil and other imports in recent months, Sumita noted.

Finance Minister Tatsuo Murayama said the central bank was following a trend in the market where rates have been rising. He insisted that the measure “will continue the maintenance of domestic-led growth . . . in line with the tenor of international coordination” and Japan’s promises to spur imports and reduce its trade surpluses.

Higher interest rates usually dampen growth, but Sumita said personal consumption and equipment investment were strong enough so that “if price stability is preserved, economic growth will continue.”

He said the central bank will start checking commercial banks’ loan plans in order to prevent excessive lending of the sort that has contributed to an explosion of land and stock prices.

Business leaders were divided in their reaction. Eishiro Saito, chairman of the Federation of Economic Organizations, said, “Economic conditions are extraordinarily smooth. There was no need to change policy.”

Called Overdue

But Takashi Ishihara, head of the Japan Assn. of Business Executives, said the move was overdue.

The action came after wholesale prices for the first 10 days of May rose 3.1% compared with the same period last year. Prices had risen 2.5% in April, and the 10-day May increase was the largest since January, 1981.

The central bank said the erosion of the yen’s value had pushed up import prices in yen by 8.8%, compared with the same period last year. Sumita also complained that price stability was being threatened by a tightening supply of labor.