Japan expects rate rise next week

Speculation mounted today that Japan would raise interest rates next week for the first time in six years after the government upgraded its forecast for annual economic growth.

The cabinet office reportedly said it expected Japan's GDP to grow by 2.1% in real terms through to the end of March, up from its previous forecast, made this January, of 1.9%. The government plans to raise its projections for nominal GDP growth to 2.2% for 2006, a rise of 0.2%, local media reports said.

Senior officials reiterated their belief that the end of deflation was in sight but cautioned the Bank of Japan against making a sudden shift in monetary policy while the region was still reeling from Wednesday's missile launches by North Korea.

"The Bank of Japan needs to examine what impact the missile launches had on the market and what impact they will have in the future when deciding policy," said Sadakazu Tanigaki, the finance minister.

Recent data suggests the country's economic recovery is being sustained by firm capital spending and unexpectedly strong consumer spending, which has risen steadily since last November after seven years of decline.

All eyes will be on the bank when it meets next week amid expectations that it could finally end its quantitative easing monetary policy, which has kept interest rates at near zero for six years by flooding banks with trillions of yen to help them service bad loans and kick-start an economic recovery.

Most analysts now believe the central bank will approve a small but politically significant rise in interest rates when its policy board meets on July 13-14.

The bank decided today to require all nine members of its board to disclose their personal assets by the end of September in response to the public outcry over controversial investments held by the bank's governor, Toshihiko Fukui.

The bank was forced to review its internal regulations on assets after Mr Fukui revealed last month that he had invested 10m yen (£47,000) in 1999 in an equity fund run by Yoshiaki Murakami, a high-profile entrepreneur who is awaiting trial on charges of insider trading.

Although Mr Fukui was head of a private thinktank when he invested the money, he held on to his investment, along with shares in five companies, after becoming the bank's governor in 2003.

He did not liquidate the investment until this February, a month before the bank announced its decision to end monetary easing and as rumours circulated that Mr Murakami, a bureaucrat-turned-investor, could soon be the subject of an investigation.

Mr Fukui reportedly made as much as ¥22m on his investment, although he has said he will donate the profits and the initial investment to charity.

The regulatory measures, to be overseen by a five-member panel of lawyers and accountants, will also require the central bank's executives to offload any investments in private funds and ban them from trading in stocks and investment trusts.

"We have decided to take into account the proposals as much as possible and to review our regulations as soon as possible," the bank said in a statement.

Its deputy governor, Toshiro Muto, said the Fukui affair would have no bearing on monetary policy. "Policy will be determined by an overall assessment of not only prices but of actual conditions in domestic and global economies and financial markets," he said.

Mr Fukui has resisted calls to step down, even after a poll conducted late last month by the Asahi newspaper showed that almost 70% of the public thought he should resign to restore trust in the central bank.

He enjoys the backing of several senior government figures, including the prime minister, Junichiro Koizumi, and received a further boost today when Jean-Claude Trichet, president of the European Central Bank, said his international colleagues held him in the "highest esteem".

"I am absolutely sure that monetary policy decisions will remain in the future, as in the past, with a good and appropriate professional guidance from governor Fukui without any other consideration," Mr Trichet told reporters in Frankfurt. "All colleagues in the community of central bankers have the highest esteem for governor Fukui."