End of "money for nothin"?

TOKYO - Japan's central bank raised interest rates Friday for the first time in six years, ending an era of zero percent interest and sending the clearest signal yet that the world's second-largest economy has pulled out of a decade-long slump.

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The decision boosts the Bank of Japan's key overnight call rate to 0.25 percent from 0.069 percent — effectively zero.

The move was widely expected by analysts and investors, and puts Japan closer in line with monetary policy in the United States and Europe, where central banks are also tightening the reins on easy money.

It was "absolutely" the right move at the right time, said Jesper Koll, chief economist at Merrill Lynch in Tokyo.

"Zero interest rates were a necessary emergency policy," Koll said. "But Japan needs the beginning of a normalization process. Normality means money isn't free."

The zero percent interest policy did not mean Japanese consumers and businesses were able to get interest-free loans. Japanese banks still charged interest, albeit relatively low — mortgage rates were less than half of what they are in the United States — but did not have to pay interest on deposits.

The central bank's rate hike will likely nudge higher the rates consumers and small businesses are charged. This was widely anticipated, causing Japanese bank lending to grow at its fastest pace in over a decade in June, fueled in part by an "act now" mentality on the part of borrowers.

Japan lowered rates to zero in 2001 in an attempt to jump-start the beleagured economy and wipe out a destructive trend of sprialing price declines, known as deflation, that eroded corporate earnings and workers' paychecks.

Raising rates underlines that deflation is quickly becoming a distant memory and that the economic recovery is gathering speed.

"Today's decision will contribute to ensuring price stability and achieving sustainable growth in the medium and to long term," the BOJ said in a statement released after the policy board's unanimous 9-0 vote to raise rates at the end of a two-day meeting.

Prime Minister Junichiro Koizumi, in Jordan for a visit, said Japan hasn't yet emerged from deflation yet, but is close. "I hope we emerge from deflation as soon as possible, but that hasn't happened yet," he said.

In a nod to concerns that higher borrowing costs could stifle Japan's nascent economic comeback, BOJ chief Toshihiko Fukui emphasized that the bank will act cautiously with further interest rate movements.

"We are not embarking on so-called consecutive interest rate hikes," Fukui said at an afternoon news conference. "We will carefully study the state of the economy and prices to gradually adjust interest rates."

The bank's move links Japan with the other major economies in terms of monetary policy. In June, the European Central Bank raised its key interest rate to 2.75 percent, while the Federal Reserve has lifted the fed funds rate 17 times straight to 5.25 percent.

Some consumers will see immediate — albeit still meager — benefits as retail banks gradually lift interest paid on savings accounts. Tokyo-Mitsubishi UFJ Bank, the world's biggest bank by assets, announced it would lift the interest on basic savings accounts to 0.1 percent, from 0.001 percent, starting Tuesday.

Fukui also said he would not resign over an investment scandal that has eroded public trust in the central bank.

Fukui acknowledged last month he had invested in a fund run by Yoshiaki Murakami, a well-known shareholder activist who was arrested on charges of insider trading recently.

The investment wasn't illegal, but it has prompted questions about conflict of interest. It also sparked public outrage that Fukui's investment had more than doubled to 22 million yen ($190,000), while most Japanese were earning virtually no interest on their savings because of the Bank of Japan's zero interest rate policy.

Fukui has repeatedly apologized while denying any wrongdoing. He also has donated the entire investment to charity.

He stood his ground again Friday, reiterating his plans to stay on.

"I caused a fuss and worried many people, but I still have a duty to fulfill," he said. "There is no change in my intention."

In the weeks leading up to Friday's decision, several ruling party officials had urged the bank to hold off, worried that the BOJ would repeat the mistake it made in August 2000, when it lifted borrowing rates prematurely — and choked a recovery.

Fukui defended Friday's hike saying the economy is on firmer footing today.

"Objectively speaking, economic fundamentals are more robust and adverse to shocks than they were in 2000," he said.

Japanese stocks fell — but some of that was attributed to worries about soaring oil prices amid rising violence in the Mideast, traders said. Tokyo's benchmark index tumbled 252.71 points, or 1.67 percent, to 14,845.24 points.

Compared to six years ago, Japan's economy is much stronger, with corporate profits up, unemployment falling to eight-year lows and prices rising. The economy has turned in five straight quarters of growth, and forecasts call for up to 3 percent growth this year.

Proponents of a rate hike say it is need to head off inflation as Japan recovers. May's consumer prices rose 0.6 percent for the seventh monthly gain.

"In this environment, maintaining the previous level of the policy interest rate may result in large swings in economic activity and prices in the future," the central bank said, adding that Japan's economy continues to expand moderately and that consumer prices are in a general upward trend.

Koll said he expects the BOJ to raise interest rates by 0.25 percent each quarter over the next year so that the key rate stands at 1 percent next summer.

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With reporting by Hiroko Tabuchi in Tokyo.