Citing stronger wages and an inflation rate still above the central bank's target, the Bank of Japan on Friday lifted its key short-term rate to 0.5% from 0.25%, but also projected only tepid economic growth through fiscal 2026.

In fresh economic projections, the Bank of Japan forecast the nation's widely quoted core consumer price index (CPI)-core, that strips out fresh food, will rise by 2.7% in fiscal 2024 ended on April 1, and then rise by 2.4% in fiscal 2025.

Only in fiscal 2026 will the CPI-core recede to within the central bank's 2% annual target, estimated the Bank of Japan.

In recent years, the Bank of Japan has indicated it seeks stronger wage growth in Japan, on the prospects that better pay would induce more consumer spending, and boost overall economic growth.

In its prepared statement, the Bank of Japan noted that Japan's companies are "shifting more toward raising wages," one indication that monetary stimulus has worked, and can be eased back.

Bank of Japan officials, in recent meetings with private sector managers, noted that "many business leaders at large corporations have promised bumper wage increases since the beginning of the year," reported The Mainichi newspaper.

While wages may rise in 2025, economic expansion likely will remain sluggish. Japan's gross domestic product (GDP) is expected to expand by 0.5% on year through fiscal 2024 ended April 1, and then rise by 1% on year in both fiscal 2025 and 2026, estimated the Bank of Japan.

Despite raising rates, the central bank noted the "real" interest rate, that is the nominal interest rate minus the rate of inflation, remained negative and thus stimulative. "Real interest rates are expected to remain significantly negative, and accommodative financial conditions will continue to firmly support economic activity," said the Bank of Japan.

Japan's financial system remains sturdy, added the Bank of Japan. There is little evidence of overheating in asset or property markets, and even unexpected economic reverses will be hurdled by lenders, "mainly because Japanese financial institutions have sufficient capital bases," said the Bank of Japan.

Separately, Japan's core CPI in December rose 3% from a year earlier, the biggest rise in more than 12 months, as government subsidies for utility bills ended, Statistics Japan reported on Friday.