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 per cent to 0.5 per cent - a level Japan has not seen in 17 years.
The widely expected move underscores the central bank's resolve to steadily push up interest rates to around one per cent - a level analysts see as neither cooling nor overheating Japan's economy.
Japan's underlying inflation is heading towards the BOJ's two per cent target. (AP PHOTO)
"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 two per cent 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 realised. But it removed a phrase stressing the need to scrutinise 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 one per cent - there's not going to much room for the market to price in further hikes in the future."
In a quarterly outlook report, the BOJ board raised its price forecasts to project core inflation moving at or above its two per cent target for three straight years.
It also said risks to the inflation outlook were skewed to the upside amid intensifying labour 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 board now projects core consumer inflation to hit 2.4 per cent in fiscal 2025 before slowing to 2.0 per cent in 2026. In the previous projection made in October, it expected inflation to hit 1.9 per cent in both fiscal 2025 and 2026.
It made no change to its forecasts that Japan's economy will grow 1.1 per cent in fiscal 2025 and 1.0 per cent in 2026.
