The Bank of Japan raised its main interest rate today by a quarter percentage point to 0.50 per cent, the highest in more than a decade, but the yen fell on signs the central bank will be cautious about further increases.
The BOJ, whose board members voted 8-1 for the rise, said the economy was likely to continue growing and it would make further rate adjustments only gradually.
That was enough to spook yen investors and lead to wild swings in the foreign exchange market. In pushing up the cost of money, at a time when many politicians have expressed concern about the Japanese economy, the central bank has underlined its independence.
But, ironically, that could be a bad omen for the yen. Analysts believe the BOJ's hawkish stance now might influence the Japanese government when it nominates future board members. Two of the BOJ's nine board members are set to retire in two months.
The government, playing down the idea of any rift, said rate decisions were up to the BOJ. "I understand the BOJ reached its conclusion after a thorough examination and discussion," Japanese Finance Minister Koji Omi told parliament. "I'd like to respect that decision."
Chief cabinet secretary Yasuhisa Shiozaki said the government and the BOJ shared the same view about the economy. The rise marks the third major policy move in less than a year.
Last March, the BOJ ended its so-called quantitative easing policy of pumping excess money into the banking system. In July it followed up with a rate rise to 0.25 per cent from virtually zero, the first rate increase in six years.