The Bank of Japan raised interest rates on Friday to levels unseen in three decades and signalled its readiness for further hikes, taking another landmark step in ending decades of huge monetary support and near-zero borrowing costs.

The move underscored the central bank's conviction that Japan was on course to stably hit its two percent inflation target backed by wage gains and ready for a continued normalisation of monetary policy.

"Judging from recent data and surveys, there is a high chance the mechanism in which wages and inflation rise moderately in tandem will be sustained," the bank said in a statement in explaining the rate-hike decision.

"Given that real interest rates are at significantly low levels, the BoJ will continue to raise interest rates" if its economic and price forecasts materialise.

In a widely expected move, the bank raised short-term interest rates to 0.75 percent from 0.5 percent in the first increase since January.

The decision was made by a unanimous vote.

The move takes interest rates to levels unseen since 1995, when Japan ⁠was reeling from the bursting of an asset-inflated bubble that drew the BoJ into a prolonged battle with deflation.

Markets are focusing on governor Kazuo Ueda's post-meeting news briefing for clues on the pace and extent of future rate rises, which may have global market repercussions by altering the yen's status as a cheap source of funding for investors.

"Having been a major funding currency for a sustained period of time, we expect the Bank of Japan to remain gradualist in its approach to normalising monetary policy and to clearly signal any future changes," said Mel Siew, Asia credit portfolio manager at Muzinich in Singapore.

The yen fell more than 0.3 percent to 156 per US dollar after the policy announcement, which had largely been factored in by markets.

The benchmark 10-year Japanese government bond yield rose 3.5 basis points to hit 2 percent, marking the highest level since May 2006.

In the statement, the BoJ maintained its view underlying inflation would converge around its two percent target in the latter half of its three-year projection period through fiscal 2027.

But hawkish board members Hajime Takata and Naoki Tamura dissented.

Takata said underlying inflation has already achieved the target, while Tamura said it would do so as soon as the middle of the three-year projection period.

"It is highly likely that firms will continue to raise wages steadily next year," the BOJ said in the statement, signalling its optimism that further rate hikes would be justified.

It also said uncertainties surrounding the US economy and the impact of higher levies have declined. (Reuters)