The decision marks its first rate hike since July last year and comes days after the inauguration of US President Donald Trump, who is likely to keep global policymakers vigilant ahead of potential repercussions from threatened higher tariffs.

At its two-day meeting concluding on Friday, the BOJ raised its short-term policy rate from 0.25 percent to 0.5 percent - a level Japan has not seen in 17 years. It was made in an 8-1 vote with board member Toyoaki Nakamura dissenting.

The widely expected move underscores the central bank's resolve to steadily push up interest rates to around 1 percent - a level analysts see as neither cooling nor overheating Japan's economy.

"The likelihood of achieving the BOJ's outlook has been rising," with many firms saying they will continue to raise wages steadily in this year's annual wage negotiations, the central bank said in a statement announcing the decision.

"Underlying inflation is heightening towards the BOJ's 2-percent target," the central bank said, adding that financial markets remain stable as a whole.

The BOJ made no change to its guidance on future policy, saying that it will continue to raise interest rates if its economic and price forecasts are realized. But it removed a phrase stressing the need to scrutinize risks surrounding overseas economies and markets.

"Their logic remains the same. They are still far away from neutral, so it's natural to make an adjustment," said Naka Matsuzawa, chief macro strategist at Nomura Securities in Tokyo.

"Unless the BOJ either changes the logic of rate hikes, or even raises the neutral point, which they have been mulling - about 1 percent - there's not going to much room for the market to price in further hikes in the future."

The yen rose around 0.5 percent to 155.32 per dollar after the decision, while the two-year Japanese government bond (JGB) yield rose to 0.705 percent, the highest since October 2008.

In a quarterly outlook report, the board raised its price forecasts to project core inflation moving at or above its 2 percent target for three straight years.

It also said risks to the inflation outlook were skewed to the upside amid intensifying labor shortages, rising prices of rice and the boost to import costs from a weak yen.

"With regards to this year's annual wage negotiations, there have been many views expressed by firms that they will continue to raise wages steadily," the report said.

The head of Japan's union umbrella group told Reuters on Friday that Japanese annual pay increases must exceed the 5.1 percent secured last year as real wages continue to fall.

The board now projects core consumer inflation to hit 2.4 percent in fiscal 2025 before slowing to 2.0 percent in 2026. In the previous projection made in October, it expected inflation to hit 1.9 percent in both fiscal 2025 and 2026.

It made no change to its forecasts that Japan's economy will grow 1.1 percent in fiscal 2025 and 1.0 percent in 2026.

While the US economy has been solid and financial markets stable as a whole, the BOJ must be vigilant to uncertainties surrounding US policy conduct, the report said.

"The hike may have been expected but in what feels like the first time in a very long time, there were no major downgrades to their economic outlook," said Matt Simpson, senior market analyst at City Index in Brisbane.

"This keeps the door open to another 25bps hike by the year-end, and rates to sit at a whopping 0.75 percent."

Japan's core consumer inflation accelerated to 3 percent in December, the fastest annual pace in 16 months, data showed earlier on Friday, in a sign rising fuel and food prices continue to push up living costs for households.

After taking the helm in April 2023, Ueda dismantled his predecessor's radical stimulus program in March last year, and pushed up short-term interest rates to 0.25 percent in July.

BOJ policymakers have repeatedly said the central bank will keep raising rates, if Japan makes progress in achieving a cycle in which rising inflation boosts wages and lifts consumption - thereby allowing firms to continue passing on higher costs.