The Bank of Japan (BOJ) raised interest rates for the first time in six years today after it lifted its key overnight rate by a quarter point from zero.
The BOJ joined central banks in the United States and Europe that have already embarked on a credit-tightening cycle, although Japan's new rate remains minuscule and further increases are expected to be slow.
"Japan's economy continues to expand moderately, with domestic and external demand and also the corporate and household sectors well in balance," the BOJ said in a statement.
In such an environment, keeping rates at zero could have resulted in "large swings in economic activity and prices in the future," the central bank said.
It added, however, that "an accommodative monetary environment ensuing from very low interest rates will probably be maintained for some time."
BOJ board members voted unanimously for the rate rise.
Financial markets had expected the increase, though foreign exchange, and bond traders were betting that cautiousness by the BOJ would keep the rate gap between Japan and other big countries wide for some time yet.
The yen slipped following the announcement after dropping to a two-week low earlier on Friday. The BOJ earlier supplied extra funds to the money market as overnight call money rates jumped in anticipation of a rate rise.