As widely expected, the Bank of Japan has announced a hike in unsecured overnight call rate to 0.25 per cent after keeping it at zero per cent since 1999. The unanimous decision by the BoJ board was announced at the end of its two-day meeting today.

"Taking account of the current assessment of economic activity and prices, the Bank judged it appropriate to adjust the level of the policy interest rate at this juncture so that a desirable course of economic activity and prices was to be maintained. Today''s policy decision will contribute to ensuring price stability and achieving sustainable growth in the medium to long term", the BoJ said.

The official overnight lending rate of BoJ, also called the basic loan rate, has been increased from 0.1 per cent to 0.4 per cent. The decision to hike the basic loan rate was not a unanimous one, as one-third of the voting directors cast dissenting votes. This is seen as an indication that there would be considerable opposition from the BoJ directors to future rate hikes, unless there are strong economic growth signals.

In the statement issued by BoJ, the central bank is non-committal on future rate policy, but is clear about its preference for low interest rates.

"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", the statement said.

BoJ is positive about the prospects for economic growth. The Japanese government has forecast a GDP growth of over 2 per cent for the current year and the economy is expected to decisively come out of nearly decade-long period of deflation.

"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. The year-on-year rate of change in consumer prices is projected to continue to follow a positive trend", the BoJ statement added.

Most economists believe that the chances of another rate hike by BoJ during the current year are low. However, if the Japanese economy maintains its growth trajectory, they expect rates to firm up to 0.75 per cent by next year.

Global financial markets are worried that rising interest rates would lead to a decline in Japanese carry-trades, which refers to borrowing at extremely low rates in Japan and investing in higher yielding overseas assets. These carry-trades had added to global liquidity for the last several years.