BOJ raises key interest rate, aims to curb yen's slide against dollar

The Bank of Japan raised its key interest rate Wednesday to about .25 per cent from zero to about 0.1 per cent, acting to curb the yen's slide against the US dollar.

The move was widely expected, and the yen gained sharply against the dollar ahead of Wednesday's decision, trading at 152.75. But the dollar rebounded slightly after the decision, to 153.17 yen.

Share prices in Tokyo slipped 0.2 per cent after the decision, to 38,463.18 after the decision.

The central bank has kept interest rates near or below zero for years, seeking to spur inflation in hopes that would sustain stronger growth for one of the world's largest economies.

That strategy has proven controversial. It did help to end a prolonged bout of deflation, or falling prices. But since wages failed to keep pace with price increases, consumers have tended to spend less rather than more.

Still, the bank said conditions warranted a change. A weak yen has pushed prices in Japan higher since it makes imported gas, oil and other necessities more expensive. The main index of inflation has exceeded the BOJ's target of about 2 per cent for months.

Inflation expectations of firms and households have risen moderately, the BOJ said in its policy statement. The year-on-year rate of change in import prices has turned positive again, and upside risks to prices require attention.

The ultra-lax monetary policy also involved massive central bank purchases of Japanese government bonds and other assets to inject cash into the economy. The BOJ has been moving toward unwinding that stance but was wary of stifling growth by raising the cost of borrowing.

The central bank shifted away from a negative policy rate only in March, raising the overnight call rate for banks to 0.1 per cent from minus 0.1 per cent.

The dollar's gains have reflected high interest rates in the United States, where the Federal Reserve is forecast to cut its main rate in September and to hold steady at a policy meeting later Wednesday.

The Bank of England also was expected to issue a rate decision later Wednesday.