The Bank of Japan raised its benchmark interest rate to its highest level since 1995, accelerating the pace of increases in its current cycle to counter persistent inflation and ease the impact of a weak yen.

The widely anticipated move brings the policy rate to 1.25% from 1.0%, quickening the usual pace as concerns mount over persistent price pressures stemming from the Middle East energy shock and exacerbated by the yen's weakness.

However, the yen fell after the announcement as two dovish board members voted against the hike, raising doubts about the pace of further policy changes.

The BOJ paused after its last rate increase in June, but hawkish comments from central-bank officials--along with supportive remarks from U.S. Treasury Secretary Scott Bessent--led markets to almost fully price in Friday's decision.

BOJ policymakers have repeatedly warned that underlying inflation could overshoot their 2% target, stressing the need to closely monitor upside risks.

The Federal Reserve's decision to also raise rates earlier this week added to the conviction that the BOJ will need to continue tightening to keep the Japan-U.S. rate differential as yen-friendly as possible.

The two dissenting board members, Toichiro Asada and Ayano Sato--both appointed by Prime Minister Sanae Takaichi--pointed to a lack of strength in prices and economic conditions.

With the yen weakening to 157 per dollar for the first time in two weeks, BOJ watchers say the opposing votes from the two Takaichi appointees could signal that the premier doesn't favor monetary tightening.

Consumer-price-index data released Friday showed that the measure excluding volatile fresh food and energy prices rose 1.9% in August from a year earlier, slightly below the BOJ's 2% target. But economists expect price growth to accelerate in the coming months as the effects of rising oil costs emerge with a lag and food inflation persists.

Economists say it isn't a matter of whether the BOJ will keep raising interest rates, but how quickly and by how much.

The BOJ on Friday reaffirmed its intention to raise interest rates further.

Noting underlying inflation has been approaching 2%, the central bank said it will "continue to raise the policy interest rate and adjust the degree of monetary accommodation" based on economic, price and financial conditions.

BOJ policymakers have said in recent speeches that the bank should bring its policy rate closer to a neutral level--one that is neither stimulative nor restrictive to the economy. At 1.25%, the benchmark rate still sits near the bottom of the BOJ's estimated neutral range of 1.1% to 2.5%.

"The BOJ is expected to raise interest rates at a faster pace than previously toward a neutral level for the economy" to unwind easy monetary conditions that continue to fuel inflation, even after its latest rate increase, said Yusuke Matsuo, an economist at Mizuho Securities.

Matsuo expects the BOJ's next hike to come in December or January, after it examines the impact of its previous action across the country through its network, including at branch managers' meetings.

Capital Economics' Marcel Thieliant expects the BOJ to lift its policy rate to 2% as soon as mid-2027.

"Given that the bank believes that accommodative financial conditions are expected to be maintained after the change in the policy interest rate, that suggests that further tightening is forthcoming," the economist said.