The Bank of Japan has raised the base rate of interest a quarter point to 0.5 per cent saying that consumer spending and price stability had put growth on a steady footing.
The rise was insufficient to stem the fall of the yen however, with the currency falling to ¥120.34 against the dollar and ¥158.17 against the euro.
The vote to raise rates was carried by eight to one and was the first in eight months but was accompanied by a bank statement that the rate would be adjusted "gradually".
Recent economic indicators have shown that Japan's economy grew 4.8 per cent over the last quarter of 2006 with consumer spending rising faster than anticipated.
Policy makers also warned that the economy is likely to expand very gradually and that rate rises would reflect this. Analysts said a further rise was unlikely before August.
The pace of change is likely to mean that the carry trades that have hit the value of the yen will not be affected.
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