TOKYO, Japan: The Bank of Japan raised interest rates to their highest level in 31 years on Tuesday and signaled further increases could follow as policymakers focus on rising inflation pressures driven by higher energy costs.

The widely expected move lifted the central bank's short-term policy rate to 1 percent from 0.75 percent, marking Japan's highest borrowing costs since 1995 and continuing the Bank of Japan's gradual shift away from years of ultra-loose monetary policy.

The decision was approved by a 7-1 vote, with board member Toichiro Asada dissenting.

In explaining the move, the central bank said inflation risks had increased. "Taking into account that medium- and long-term inflation expectations have also continued to increase, there is a risk of underlying inflation deviating above our price target," the BOJ said.

Deputy Governor Shinichi Uchida, who spoke on behalf of Governor Kazuo Ueda during a news conference, indicated that policymakers remain prepared to tighten further if inflationary pressures continue building.

"With underlying inflation approaching 2 percent, we need to be mindful of upward price risks. We will guide policy so that we won't fall behind the curve," Uchida said.

The BOJ's decision comes as Japan faces higher energy costs linked to disruptions caused by the conflict in Iran. Although a recent U.S.-Iran peace agreement has eased some concerns, officials said companies are increasingly passing rising costs on to customers while also raising wages.

The central bank noted that risks to Japan's economy from the Middle East conflict have diminished because of progress in securing alternative energy supplies. However, it warned that inflation remains a concern as businesses continue to pass on higher oil-related costs.

Analysts said the BOJ's language suggested a stronger focus on inflation risks than in previous meetings.

"It's quite striking the BOJ mentioned so clearly that underlying inflation could deviate upward from its target," said former BOJ official Nobuyasu Atago.

"It's essentially saying there is a real risk of being behind the curve. There's a chance the BOJ could hike rates sooner than the dominant market view of a December action."

Despite the rate increase, financial markets remained calm. Japan's Nikkei stock index rose to a record high, while the yen was little changed at around 160 per dollar.

"Uchida was, as always, clear and stable. His remarks left no room for error, leaving FX markets with no opportunity to engage in speculative trading," said Shigeto Nagai, head of Japan economics at Oxford Economics.

The BOJ also announced that it would pause its bond-tapering program from April next year and continue purchasing roughly 2 trillion yen (US$12.5 billion) of Japanese government bonds each month.

While policymakers offered few clues about the timing of the next move, analysts believe another increase remains likely before year-end.

"Uchida appeared to signal the BOJ was shifting the focus of its policy on inflationary risks," said Mari Iwashita, executive rates strategist at Nomura Securities.

"If inflation overshoots around summer, the BOJ could hike in October. If not, it may wait till later. One thing is clear, which is that it will definitely hike again by year-end."