The Bank of Japan on Friday hiked interest rates from virtually zero (0.069 per cent) to 0.25 per cent.
This is the first increase in interest rates effected by Japan's central bank in almost six years.
Economists say that this is a strong signal to the world that Japan is now pulling out of the quagmire of a decade-long deflation and is headed for big economic growth.
Most analysts had expected the hike in interest rates by BoJ, and the Indian stock markets reacted negatively to the increase. Indian stock markets were trading almost 2 per cent down from the previous closing figures.
Bank of Japan Governor Toshihiko Fukui and the Monetray Policy board increased the rate in a decision that was unanimous.
The U.S. Federal Reserve increased its benchmark 17 times since 2004.
The BoJ said in a statement: "At the Monetary Policy meeting held today (Friday, July 14, 2006), the Bank of Japan decided, by a unanimous vote, to change the guideline for money market operations for the inter-meeting period, effective immediately from the announcement of the decision."
"The Bank of Japan will encourage the uncollateralized overnight call rate to remain at around 0.25 per cent."
"With respect to the complementary lending facility, the Bank decided, by a 6-3 majority vote, to change the basic loan rate[Note] applicable under the facility to 0.4 per cent, effective immediately from the announcement of the decision, and maintain the temporary waiver of add-on rates for frequent users of the facility."
"With respect to the outright purchases of long-term interest-bearing Japanese government bonds, purchases will continue at the current amounts and frequency for some time, with due regard for future conditions of the balance sheet of the Bank."
"Japan's economy continues to expand moderately, with domestic and external demand and also the corporate and household sectors well in balance. The economy is likely to expand for a sustained period. Developments are broadly in line with the projection in the Outlook for Economic Activity and Prices (hereafter the Outlook Report) released on April 28, 2006. The year-on-year rate of change in consumer prices is projected to continue to follow a positive trend."
"The bank has maintained zero interest rates for an extended period, and the stimulus from monetary policy has been gradually amplified against the backdrop of steady improvements in economic activity and prices. In this environment, maintaining the previous level of the policy interest rate may result in large swings in economic activity and prices in the future."
"Today's policy decision will contribute to ensuring price stability and achieving sustainable growth in the medium to long term."
"On the future path of monetary policy, the bank will conduct monetary policy by carefully assessing economic activity and prices. The bank will adjust the level of the policy interest rate gradually in the light of developments in economic activity and prices if they follow the projection presented in the Outlook Report. In this process, an accommodative monetary environment ensuing from very low interest rates will probably be maintained for some time."