TOKYO, Japan: After decades of ultra-loose monetary policy, Japan's central bank has taken an historic step, in taking borrowing costs to their highest level in 30 years, reinforcing its shift away from emergency-era stimulus.

The Bank of Japan as expected raised interest rates on Friday and signaled its intention to continue tightening, even as it navigates headwinds from U.S. tariffs and the inauguration of a dovish prime minister. The move caps a year in which the BOJ delivered two rate hikes, underscoring Governor Kazuo Ueda's drive to normalise policy.

While still modest by global standards, the  0.25 percent increase marks another turning point for an economy long accustomed to near-zero rates and unconventional easing.

At the end of the two-day policy meeting concluding Friday, the BOJ lifted its short-term policy rate to 0.75 percent from 0.50 percent, as inflation has remained above its 2 percent target for nearly four years, driven in part by persistently high food prices.

The central bank has emphasised its readiness to keep raising rates, although without committing to a specific pace,. Any future hikes would depend on how the economy responds to higher borrowing costs.

"There's no gap in the view on the economy" between the government and BOJ, Finance Minister Satsuki Katayama told reporters, signalling the administration's acceptance of a move to 0.75 percent.

The decision highlights the BOJ's growing confidence that Japan is achieving a sustainable cycle of rising inflation and steady wage growth, a key condition it has long said must be met before tightening policy further.

In a rare, ad hoc poll released this week, the BOJ said most of its regional branches expect companies to deliver substantial wage increases again next year, driven by intensifying labour shortages.

BOJ officials have signalled they intend to proceed cautiously as rates move closer to levels considered neutral for the economy, which the central bank estimates to be between 1 percent and 2.5 percent.

At the same time, analysts say Ueda faces pressure to avoid sounding overly hawkish, as that could trigger renewed weakness in the yen. A weaker yen raises import costs and fuels inflation, even as it boosts exporters' profits.

Rising prices are already straining households, which continue to grapple with declining real wages. Retailers may pass on higher costs if the yen slides further, adding to inflationary pressures.

According to a survey by private think tank Teikoku Databank released last month, more than 20,000 food and beverage items saw price increases this year, up 64.6 percent from 2024. That number is expected to fall sharply to just over 1,000 items in 2026.

However, analysts warn that price hikes could surge again if the yen depreciates further, complicating the BOJ's policy decisions next year.

Government officials have said Japan stands ready to intervene in currency markets to curb abrupt and excessive yen moves that are out of line with economic fundamentals — a sign that the administration and the central bank share concerns over sharp currency swings.

Kei Fujimoto, senior economist at SuMi TRUST, said the yen is unlikely to strengthen significantly from a December rate hike that markets have already priced in, noting that recent weakness has stemmed mainly from worries about Japan's fiscal outlook.

"Both a weak yen and higher interest rates may push up consumer prices, corporate production costs, and funding costs, potentially weighing on business sentiment," he said.