From the day he was appointed to lead and reform the scandal-ridden financial institution just a year ago, Bank of Japan Governor Mr Masara Hayami, has been saying it loud and clear. "My task is to decide when to raise those overly low rates," he said at his first press conference on August 3rd, 1999, referring to Japan's policy of zero interest rates.

And on Friday last the outspoken 74-year-old former business executive did just that, ignoring the bulk of world economic opinion that one shouldn't embark on a tightening of monetary policy when the economy is not performing well. In a way it was confirmation that Mr Hayami has finally established the independence of the central bank, which was promised a year and a half ago after a major banking scandal. He has won a struggle for power with Tokyo's old-boy network which in former times would never have tolerated the central bank making such a decision on its own - that would have been the preserve of whoever was the current "Mr Yen," ie. the finance minister.

He would have done the deed earlier Mr Hayami said, but delayed because of Japan's June 25th general election, the G7 meeting in July, and the collapse of the giant Sogo department store chain. The decision deals a blow to the weakest elements of the Japanese economy at a time when debt owed by failed companies has surged to a post-war high, and the number of bankruptcies is likely to rise further, according to the credit research company, Teikoku Databank. In June, 1,560 companies failed, 2.1 per cent more than the previous month and the total bankruptcies for the year will be a record according to the Fuji Research Institute.

Many of the businesses hurting are in construction and retailing, the traditional bulwarks of the dominant Liberal Democratic Party, which partly explains the furious opposition to the rate rise from Prime Minister Yoshiro Mori and Finance Minister Kiichi Miyazawa.

So just why did the world's third most important central bank raise interest rates, defying even the International Monetary Fund in Washington which regards Japan's turnaround as "underpowered and uneven" and has warned of a new recession, calculating that the economy will grow by only 1.5 per cent this year, and 1.75 per cent next year.

Many analysts point out that the central bank's decision will make borrowers and lenders more aware of the cost of money and the risks involved, and that any companies which don't survive the modest 0.25 per cent rise do not deserve to. They say the corporate sector will have to face the fact that it cannot borrow its way out of trouble at no cost. Some observers feel the bank simply wanted to try something different after a decade of indifferent growth. Mr Graham Harris of the Harris Consultancy in Tokyo sees it as a psychological move, tied up with Mr Hayami's personality, and resulting from his feeling "that Japan was wasting an opportunity with zero interest rates for structural reform, and that they have to start thinking more longer term and getting their act together."

A senior European diplomat, who said he was told by Mr Hayami a year ago that he would raise interest rates when the economy had recovered, agreed that it seemed meant as a "shake out", and that the Bank of Japan felt it could raise interest rates because the economy had been stabilised by a high injection of public expenditure. However he added that he was a bit less optimistic now than a couple of months ago about Japan's long-term economic recovery, and was worried about the potential impact on expectations.

But as so often when analysing Japanese economic trends, the experts do not agree. The US credit-rating agency Standard & Poor gave a favourable judgment. The Bank of Japan's decision might put pressure on the short-term credit quality of Japanese firms, it concluded, but would bring medium-term benefits to the overall economy by forcing corporate productivity to improve. The market also took a sanguine view, reacting calmly to the news, mainly, said one analyst, because such a small rate increase would not have much impact on the economy, and there was little prospect of another for a long time.

But one of the bank's harshest critics in the United States, Massachusetts Institute of Technology economist Mr Paul Krugman, predicted that "future economic historians may look back at the move as the beginning of the end for an era, and not just in Japan." Writing in the New York Times Mr Krugman warned that, "in the near future, whatever optimism people are now feeling about Japan's economy will evaporate, and the nation's malaise will be deeper than ever - thanks in large part to the action on Friday." He went on to suggest that the Bank of Japan had raised interest rates in an economy where consumer prices were falling, gross domestic product was lower than three years ago, and unemployment had reached a post-war high, just to show its independence and not to lose face.

"This says something about what kind of policy Japan can expect from its central bank in future - and it is not the sort of thing that would encourage people to go out and spend." Mr Hayami defended his controversial decision by calling the zero interest rate "abnormal", and emphasising that the rise was an attempt at "normalisation" of monetary policy rather than the beginning of a tightening cycle. The zero-interest-rate policy was also hindering the emergence of successful high-tech start-ups, he said. "If we retain zero interest rates indefinitely, these places will lose vitality, and it will end up being a minus for Japan's economic recovery."

The resolve of the central bank board was also stiffened perhaps by the bullying tactics of government ministers. Members may have felt they needed to vote for a rate increase to show simply they were able to resist political pressure. "It is precisely at such a time that we must exercise our independence," Mr Hayami said. The governor of the Bank of Japan remains unshaken by the tsunami of criticism from the government. He expresses confidence that the Japanese economy is now strong enough to withstand a rate rise, and that the danger of deflation has passed.

But misjudgment in similar circumstances have been made before by Japan's leading financial decision makers. In 1997, when it also appeared that the economy was recovering, the Government decided to rein back the fiscal deficit by sharply increasing taxes on consumption. The resulting blow to consumer confidence stalled the recovery then. If the same thing occurs this time, the independence of the Japan's central bank could be short lived indeed.