The Bank of Japan raised interest rates to a 31-year high on Friday and signalled its readiness to keep pushing up borrowing costs, joining other major central banks in fighting persistent inflation pressures driven by soaring oil costs.

The widely expected move, which was the first hike in three months, takes interest rates closer to levels the central bank deems neutral to the economy, marking another step away from decades of ultra-low rates that cemented the yen's status as a cheap global funding currency.

It follows rate hikes by its European and US peers, highlighting central bank's focus on global inflation risks caused by the Iran war-induced energy cost spike, expansionary fiscal policies and surging demand for AI investment.

At the two-day meeting ending on Friday, the bank raised its policy rate to 1.25 percent from one percent by a 7-2 vote.

Doveish board members Toichiro Asada and Ayano Sato were the dissenters.

"Wholesale inflation remains elevated and price pressures from business-to-business trading has started to spill over into consumer prices," the bank said in a statement announcing the decision.

"Underlying inflation has been approaching two percent" as companies continue to pass on the cost of higher wages and inflation expectations keep heightening, it said.

While economic and price developments are moving in line with the bank's baseline forecast, there was a risk of underlying inflation deviating from its two percent target, it said.

Markets are focusing on bank governor Kazuo Ueda's news conference, scheduled for later on Friday for clues on the pace and timing of future rate hikes.

A hike to 1.25 percent brings the rate within the bank's estimated 1.1 percent to 2.5 percent range of Japan's nominal neutral rate, or the level that neither cools nor overheats growth, raising questions about how far it could eventually hike rates.

But the bank still lags global peers with its policy rate lower than that of the European Central Bank, which raised its key rate last week to 2.5 percent, and the Fed's 3.75 percent to four percent range.

The still-wide rate divergence may keep the yen weak against other currencies, pushing up import costs and broader inflation. (Reuters)





Edited by Tony Sabine