The Bank of Japan has lifted its benchmark interest rate to 0.25% and outlined plans to halve its monthly bond purchases in a decisive, if doomed, move to normalize its monetary policy.

With the Fed and all other central banks either set to move, or already moving rapidly in the opposite direction, the always confused BoJ's shift to tighter policy will narrow an interest rate gap that has driven record weakness in the yen, marking a big shift for global currency markets. It also comes at a time when Japan's economy is once again slowing, inflation is failing to take hold, wage growth is sputtering.... which is also why this will be the shortest tightening cycle since its last failed attempt to raise rates off the zero lower bound.

The Japanese currency strengthened more than 1% following the decision on Wednesday, sending the USDJPY below 150 against the dollar.

By a majority of 7-2, the BoJ raised its overnight interest rate to "around 0.25 per cent", the highest level since the global financial crisis in late 2008, from a previous range of 0 to 0.1%. The bank in March ended its negative interest rate policy following decades of on-and-off deflation.

The BoJ also said it would scale back its ¥6tn ($39bn) monthly bond-buying program to about ¥3tn by the spring of 2026, however, it would do so at a much slower pace than many had expected. Specifically, the BOJ said it would cut monthly bond purchases by ¥400 billion every quarter to decrease them to ¥2.9 trillion in 1Q 2026; the market was foreseeing 1 trillion yen per month starting August.

"It's a hawkish development with the BOJ rate hike, but reduced to some extent by the less-than-expected amount of quantitative tightening," said Alvin Tan of RBC Capital Markets. "In short, the BOJ decision today does not significantly exceed the hawkish market expectations baked into the meeting."

Others agreed, Nick Twidale, chief market analyst at ATFX markets said the BOJ's QE taper was "much less than expected and that has hit the yen hard... We're seeing gapping in a fast moving market, and given the positioning overnight we could see more in the hours ahead."

Today's rate hike came after senior government officials made unusually blunt comments in recent weeks, putting pressure on the BoJ to unwind its ultra-loose monetary policy and arrest the yen's decline.

At a news conference on Wednesday, central bank governor Kazuo Ueda said the rate decision was made because economic conditions and price movements remained "on track". But he acknowledged that upside risks to inflation posed by the weaker yen were also a factor.