The Bank of Japan has decided to move away from its policy of zero or near zero interest rates which have been so successful in preventing further deflation in Japan over the past few years. In fact the Japanese economy has recovered to the point where the Bank of Japan believes that slowly raising interest rates will not trigger a massive downturn.
This is an important shift in policy that may well have repercussions on a global scale since the Japanese economy is the world's third largest after the US and Europe.
The government of Japan is being cautious and urges the Bank of Japan to continue its accomodative policy and keep interest rates as close to zero as possible just in case deflation re-emerges as a threat. The Bank of Japan is targeting 0-2 % inflation in the medium term and may well achieve this.
But just in case the Government is hoping that the Bank will not act precipitously on the presumption that Japan is back on the normal moderately inflationary path.
How this plays itself out in terms of the value of the Yen and the willingness of the Japanese to keep buying American bonds will be a fascinating story in the months to come.
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