The Bank of Japan has raised its borrowing cost to the highest level in 17 years, following a sharp acceleration in consumer price increases in December.

The central bank's decision to hike its short-term policy rate to "around 0.5%" comes just hours after data revealed prices rose at the fastest pace in 16 months in December.

The BOJ's previous interest rate increase in July, coupled with a weak jobs report from the US, caught global investors off guard, leading to a sell-off in stock markets.

Bank Governor Kazuo Ueda had signaled the hike in advance to avoid another market shock. Official figures released on Friday showed Japan's core consumer prices rose by 3% in December compared to the previous year.

This marks the BOJ's first rate hike since July, coming just days after Donald Trump returned to the White House. During his campaign, Trump threatened to impose tariffs on all imports to the US, which could affect exporting countries like Japan.

By raising rates now, the BOJ creates room to lower them in the future if needed to stimulate the economy.

This move underscores the bank's plan to gradually increase rates toward 1%, a level considered neutral for economic growth.

The BOJ has indicated that interest rates will continue to rise from historically low levels.

Neil Newman, Head of Strategy at Astris Advisory Japan, commented, "Rates will continue to rise as wages grow, inflation stays above 2%, and there is some economic growth."

Stefan Angrick, Japan economist at Moody's Analytics, expects another 25-basis point hike in six months.

Last year, the BOJ raised borrowing costs for the first time since 2007, after maintaining low rates for years due to sluggish price growth. This rate hike ended the era of negative interest rates, which had been used by several countries to encourage spending over saving.