Mumbai: The Bank of Japan raised its benchmark interest rate from 0.25 per cent to 0.50 per cent, the highest in more than a decade, after the world's second- biggest economy expanded at the fastest pace in three years.

The BoJ policy board voted 8-1 to double the overnight lending rate from 0.25 per cent to 0.50 per cent, the bank said in a statement in Tokyo. Deputy Governor Kazumasa Iwata voted against the increase.

Japan has perhaps the lowest interest rates among major economies. The central bank said while interest-rate policy delays could spur over-investment and asset bubbles, any further increases would only be gradual.

BOJ governor Toshihiko Fukui told a news conference that the central bank does not have specific schedules in mind for future rate hikes.

While higher rates may discourage investors from borrowing in yen to buy overseas assets, the central bank has followed an independent policy by pushing up the cost of money at a time when many politicians have expressed concern about the Japanese economy.

Japanese finance minister Koji Omi told parliament that he would respect the BoJ decision. But a ruling party heavyweight, Hidenao Nakagawa, said the BOJ would be held responsible for its rate hike decision.

This is the third time in less than a year that the Japanese central bank raised its lending rate. In July it followed up with a rate rise to 0.25 per cent from virtually zero, the first rate increase in six years.

The yen turned volatile, strengthening half a yen to around 119.75 per dollar just after the rate rise and then losing all of its gains — it weakened further to around 120.60 per dollar — as the market digested the BoJ comments that this could perhaps be the last hike for some time.

Japan's interest rate at 0.50 per cent is way below benchmark rates in the United States, at 5.25 per cent, or the euro zone, at 3.5 per cent.

The huge interest rate gap has encouraged investors to sell yen in recent months in favor of the dollar or euro. The yen also hit record lows against the euro and the dollar this month.

Japan's economy is now growing at an accelerated annualised rate of 4.8 per cent (October-December) - the strongest in post-war Japan - against 0.3 per cent in the previous quarter.