The Bank of Japan will raise a key interest rate to 0.25 percent from zero next week, a news report said Tuesday, amid conflicting signals from government officials over the wisdom of such a move.
The BOJ has "decided in principle" to raise the rate by a quarter point - the first hike in almost six years - at a two-day policy meeting that starts July 13, Kyodo News agency reported, citing unidentified sources.
The report came after banking and economy minister Kaoru Yosano said the economic, price and market conditions were beginning to fall into place to allow the bank to lift borrowing rates after keeping them at zero for five years.
"While (the conditions) haven't fallen into place yet, it's clear that they are falling into place," he told a regular press conference.
"Whether it is in July or August, the Bank of Japan will make its decision as an independent institution of the nation. I believe that it will make its decision responsibly and with discernment," he said.
Prime Minister Junichiro Koizumi also said the timing of a policy change was "something that the BOJ should decide, with a close eye" on price movements, suggesting he would respect the central bank's decision.
But Finance Minister Sadakazu Tanigaki urged the bank to hold off so as not to torpedo the economy's budding recovery.
"At this point, I believe it's necessary (for the Bank of Japan) to support the economy through its zero-rate policy, to ensure that the economy sustains growth and will not return to deflation," Tanigaki told a regular press conference Tuesday.
Top government spokesman Shinzo Abe echoed those concerns, saying he wanted the BOJ to keep rates at zero "for the time being."
Speculation that the BOJ will soon raise interest rates has been spurred by recent economic data.
The bank's closely-watched "tankan" survey showed that companies are more optimistic about the future, while price data has shown consistently rising prices after years of deflation - a state of downward spiraling prices.
The BOJ has kept its key interest rate, the overnight call rate, at practically zero for five years in an unprecedented effort to rekindle the country's flat-lined economy. It has said it will start raising that rate when prices show consistent increases.
But while the central bank is officially independent, political opinion often has had an influence on central bank policy.
A scandal over Bank of Japan Gov. Toshihiko Fukui's investment in a fund run by a manager arrested on suspicion of insider trading has also muddied the outlook, with some politicians calling for Fukui to resign. That has some analysts projecting that the central bank will hold off.