The Bank of Japan (BOJ) has raised its benchmark interest rate to one per cent - the highest level since 1995.
The Japanese central bank increased the rate by a quarter of a percentage point from 0.75 per cent and cited challenges stemming from a weak Japanese yen and higher energy prices.
The central bank has been trying to normalise monetary policy after decades of keeping rates near or below zero.
The BOJ adopted ultra low rates to try to encourage more borrowing and spending to counter deflation and pull Japan's economy out of the doldrums.Â
Inflationary pressures because of the war in Iran, which has sent oil prices soaring in recent months, have hit Japan hard since it imports almost all its oil and gas.
Low interest rates had added to pressures on the Japanese yen, which has fallen to about 160 yen to the US dollar.
BOJ governor Kazuo Ueda, who has been hospitalised recently, did not attend Tuesday's policy board meeting.