The Bank of Japan (BoJ) raised interest rates on Friday to their highest in 17 years and signalled more hikes to come, sending the yen higher against the greenback.

The 25-basis-point rise to 0.5 percent comes as data indicated the Japanese economy was developing in line with BoJ expectations and followed another bumper inflation reading.

The move, which leaves borrowing costs at the highest since 2008, was also underpinned by "steadily" rising wages and financial markets being "stable on the whole", the BoJ said in a statement.

"Japan's economic activity and prices have been developing generally in line with the Bank's outlook, and the likelihood of realising the outlook has been rising," it said.

If its outlook is met, "the bank will accordingly continue to raise the policy interest rate and adjust the degree of monetary accommodation," it added.

BoJ chief Kazuo Ueda told a news conference the pace and timing of future hikes was yet to be determined.

"We would like to make a decision after we have studied the impact of this rate hike," he said.

The hawkish comments sent the yen up as much as 0.7 percent against the US dollar to 154.84 yen.

Even as other central banks have raised borrowing costs in recent years -- and started cutting again in 2024 -- the BoJ has remained an outlier.

But it concluded last March that Japan's "lost decades" of economic stagnation and static, or falling prices were over, finally lifting rates above zero.

That increase was followed by another in July that caught investors off guard and sparked turmoil in global equity and currency markets.

This time Ueda prepared markets for an increase -- some 75 percent of economists expected one -- and the reaction was more muted on Friday. (AFP)