The hike ‌was the first since December and aligns the BOJ with other central banks shifting towards tighter policy to combat inflation, including the European Central Bank.

Deputy Governor Shinichi Uchida acknowledged the recent US-Iranian peace deal, which he described as a “welcome move”, but noted persistent inflationary risks.

“Compared with the previous meeting, the risk of a sharp deterioration in the economy has diminished. On the other hand, price rises are broadening, and there is a ​risk that underlying inflation may deviate from our target,” Uchida said in a news conference he held on behalf of Governor Kazuo Ueda, who missed the meeting ​for medical treatment.

In a widely expected move, the BOJ decided to raise its short-term policy rate to 1% from 0.75%, taking borrowing costs ⁠to levels unseen since 1995.

In a statement announcing the decision, the BOJ said the risk of Japan’s economy deteriorating sharply from the Middle East conflict has diminished due to ​progress made in procuring alternative energy supplies.

The price outlook, on the other hand, warranted attention as companies were seen passing on rising oil costs to each other at a “relatively fast pace,” ​which could push up consumer prices across a wide range of items, it said.

“Taking into account that medium- and long-term inflation expectations have also continued to increase, there is a risk of underlying inflation deviating above our price target,” the BOJ said.

The decision was made by a 7-1 vote. Toichiro Asada, who joined the board in April as the first member to be hand-picked by dovish premier Sanae ​Takaichi, dissented on the view downside risks to growth from the Middle East conflict were bigger than inflation risks.

“If anything, the focus had been on whether a 50-bp rate hike ​would be proposed, but no such proposal was made. In terms of the future rate-hike path, this is positive for risk asset prices, as it suggests that a sharp rate hike is likely ‌to be ⁠avoided,” said Hirofumi Suzuki, chief FX strategist at SMBC.

“The BOJ is likely to continue raising rates at a gradual pace of around once every six months to one year,” he said.

The Nikkei 225 jumped as much as 1% to set a fresh record high above 70,000 after the announcement.

The yen rose briefly before sliding to 160.29 per dollar, teetering around the 160 line seen as heightening the chance of currency intervention.

The BOJ also decided to pause its bond taper programme from April next year and continue to buy roughly 2 trillion ​yen ($12.5 billion) in Japanese government bonds (JGB) per ​month.

It will discontinue its practice of conducting ⁠a review of its bond taper plan each year, but stand ready to amend the pace of purchases if necessary at future policy meetings.

Broadening inflation risk

The Middle East conflict has complicated the BOJ’s policy path by adding inflationary pressure through higher oil costs, while hurting ​an economy heavily reliant on imported fuel.

While the peace deal between the US and Iran eased market fears over global inflationary pressures, wholesale ​inflation spiked to a ⁠3-year high of 6.3% in May in a sign companies were already passing on higher costs from the energy shock.

Analysts expect core consumer inflation to accelerate back above the BOJ’s 2% target later this year, after sliding below the level on government subsidies aimed at curbing utility bills.

A weak yen, which pushes up import prices and broader inflation, will also keep the BOJ under ⁠pressure to stay ​on course for further rate hikes, analysts say.

The BOJ’s hike comes amid a busy week for global ​central banks.

The US Federal Reserve is widely expected to hold its benchmark interest rate steady on Wednesday but officials have recently signaled their rising concern about inflation, which has led more in the market to now predict ​its next move as being a hike rather than a cut.