The return of inflation and wage growth is giving the Bank of Japan room to raise interest rates and declare the end of a long period of stagnation.

The Bank of Japan raised its key policy rate to the highest level since 2008 and took a more bullish view on the strength of inflation.

Japan's central bank has raised its key interest rate to about 0.5% from 0.25%, noting that inflation is holding at a desirable target level.

The Bank of Japan holds its first policy meeting of the year next week and the outcome will be announced days after the inauguration of U.S. President-elect Donald Trump.

The Bank of Japan has raised short-term interest rates by a quarter point, the highest in 17 years, signalling efforts to normalise monetary policy in response to persistent inflation and increasing wages.

Japan's central bank has increased the cost of borrowing to its highest level in 17 years after consumer price rises accelerated in December. The move by the Bank of Japan (BOJ) to raise its short-term policy rate to "around 0.5 per cent" comes just hours after the latest economic data showed prices rose last month at the fastest pace in 16 months.

The Bank of Japan had held off hiking rates late last year, preferring instead to wait out any economic surprises from the White House