The Bank of Japan raised interest rates on Friday to levels unseen in three decades and signaled its readiness for further hikes beyond next year, taking another landmark step in ending decades of huge monetary support and near-zero borrowing costs.

The move underscored the central bank’s conviction that Japan was on course to stably hit its 2% inflation target backed by wage gains, and ready for a continued normalisation of monetary policy.

“Judging from recent data and surveys, there is a high chance the mechanism in which wages and inflation rise moderately in tandem will be sustained,” the BOJ said in a statement explaining the rate-hike decision.

“Given that real interest rates are at significantly low levels, the BOJ will continue to raise interest rates” if its economic and price forecasts materialise, it said.

In a widely expected move, the BOJ raised short-term interest rates to 0.75% from 0.5% in the first increase since January.

The decision was made by a unanimous vote.

The move takes interest rates to levels unseen since 1995, when Japan was reeling from the burst of an asset-inflated bubble that drew the BOJ into a prolonged battle with deflation.

The yen fell more than 0.3% after the policy announcement, which had largely been factored in by markets.

The benchmark 10-year Japanese government bond yield rose to its highest level since May 2006.

Challenges around the next move

In its statement, the BOJ maintained its view that underlying inflation will converge around its 2% target in the latter half of its three-year projection period through fiscal 2027.

However, board members Hajime Takata and Naoki Tamura dissented.

Takata said underlying inflation has already achieved the target, while Tamura said it would do so by the middle of the projection period.

Friday’s hike also brings rates closer to levels deemed neutral to the economy, which the BOJ estimates to be between 1% and 2.5%.

The BOJ ended a decade-long stimulus last year and raised rates twice, including to 0.5% from 0.25% in January, on the view that Japan was nearing durable achievement of its inflation target.

Data released on Friday showed core consumer inflation at 3.0% in November, exceeding the BOJ’s target.

Recent yen declines and resilient business confidence have further strengthened the case for continued policy normalisation.