Worried that its enviable record of restraining inflation is in danger the Bank of Japan increased the official discount rate for central bank loans today by a full percentage point to 7 1/4 percent.
The reserve rate -- the percentage of deposits commercial banks must maintain with the central -- also was raised to help slow business expansion this year.
Both moves reflected the government's new fear that a wave of inflation will roll through the economy this year in a repeat performance of the drasic price increases of the early 1970s.
The concern is that the new round of oil price increases will affect the cost of most consumer items and send prices skyrocketing as they did during the first oil crunch of 1973-74.
Through the late 1970s, Japan managed its economy to maintain a steady business expansion with only modest increases in consumer prices. After a disastrous consumer price increase of nearly 25 percent in 1974, the rate levelled off, and in 1979 Japan's increase was only 5.8 percent.
But last month the economy got a whiff of what may be about to come. Wholesale prices in January recorded the largest increase in six years. The government's wholesale price index rose 2.1 percent over last December's. tThe level was nearly 20 percent above that for January 1979.
The cost of oil and coal was a major factor, amounting to about one-third of the rise between December and January. The cost of nonferrous metals was another big ingredient.
So far the wave of wholesale price increases hasn't been felt in consumer prices, which are running about 6 percent higher than last year's. In most years, consumer prices trail wholesale prices by several months.
Until last April, the Japanese central bank had followed an easy-money policy, but beginning that month it raised the discount rate three times during the year. It is the rate the central bank charges on all loans to commercial banks.
The fourth increase, which came today, was triggered partially by the similar action taken last Friday by the U.S. Federal Reserve Board, which raised the interest rate it charges on loans to commercial banks by one percentage point to a record 13 percent. That move by the U.S. central bank had started a new, although modest, appreciation in the value of the dollar against the Japanese yen.
One reason the Japanese central bank acted so quickly was to prevent any further depreciation of the yen, which has stabilized at about 240 to the dollar for some time after a period of steady decline. It fell about 22 percent between December 1978 and December 1979.
Government economic experts believe that the yen's depreciation during much of 1979 was part of the reason for the sharp rise in wholesale prices aroung the end of the year. When the yen falls against foreign currencies, the costs of imported commodities increase, fueling inflation.
The administration of Prime Minister Masayoshi Ohira is particularly eager to restrain inflation this spring and summer because of domestic politics. Ohira's Liberal Democratic Party faces a tough upper house election this summer, and a loss of seats could topple his government. He also will be confronted by a strong challenge for the prime ministership within his own party later in the year.
In parliament today, Ohira's party sought to allay fears of spiralling inflation, promising a delegation of labor leaders that the government will hold the increase in consumer prices below 6.4 percent this year and still attain an economic growth rate of 4.8 percent.
Labor unions are arguing for a minimum wage increase of 8 percent in their spring campaign.
The cental bank's decision today probably will result in a flow of money into postal savings accounts, time deposits and government bonds, all of which will begin paying higher returns.
Soon after the central bank's announcement, commercial banks began announcing increases of one percentage point in their prime lending rates to 7.5 percent.
The Tokyo Stock Market reflected the banking announcements quickly, with share prices declining substantially.
Crude-oil increases announced last year by members of the Organization of Petroleum Exporting Countries are especially bad news in Japan, which imports nearly all of the oil it uses.
According to the Finance Ministry, the average price of oil imported in January was $29.20 a barrel, about 15 percent higher than the rate in December.