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. Last Updated: 07/27/2016

Japan Mulls Decade's First Interest Increase

TOKYO -- Faced with growing evidence that the Japanese economy is gaining momentum, the country's central bank could decide later this month to raise interest rates from their near-zero level.

Such a move would be the first increase in Japanese rates in a decade.

The latest sign of economic strength came Tuesday with the bank's closely watched quarterly survey of business sentiment, known as the tankan, which showed that big Japanese manufacturers were more confident of their future business prospects in the quarter ending June 30 than they have been in three years.

"The strength of the tankan means the probability is now quite high for a rate hike," said Masaaki Kanno, a senior economist at J.P. Morgan in Tokyo and a former official at the central bank. "But it's hard to say whether that's a good or bad thing at the moment."

The tankan survey was a tale of two economies, the global and the domestic, making it hard to draw overarching conclusions from the data.

While executives at Japan's large corporations were feeling more confident, their colleagues at smaller businesses remained gloomy. That difference will complicate the central bank's decision on interest rates, which is likely to be the hottest topic of discussion among the nine policy board members at their next meeting July 17. The central bank governor, Masaru Hayami, has made it clear that he favors raising rates very quickly, and at least two othermembers of the policy board support him.

The bank lowered short-term interest rates virtually to zero a year and a half ago, when significant parts of Japan's financial system seemed at risk of collapse and the threat of severe deflation was high. But in the process, the bank deprived itself of the ability to use interest rates to influence the economy.

While many economists and policy makers agree that bank officials did the right thing, opinions about when and how the bank should go about re-creating a more normal interest rate environment differ widely.

There is as yet no clear consensus that the budding economic recovery can flourish on its own, and the tankan survey results did little to resolve the debate.

Big companies said they intended to increase their capital investment by 4.6 percent on average in the current fiscal year, ending in March 2001, but smaller companies said they would be cutting their spending f and even more sharply than they projected in the previous quarter, from January through March.

Economists say that difference speaks about the strength of the nascent recovery in Japan's economy.

Larger corporations have been able to rely on demand in Europe and the United States to increase business. But smaller companies and service businesses may be less optimistic about the future.

Big multinationals also have less need than small companies do for the short-term financing that would become more expensive if the central bank raised interest rates. Indeed, a surge in profits has enabled many large companies to go on a spending spree using their own cash, as reflected in the continuing decline of bank lending here.