The Bank of Japan is on course to raise rates past the 0.5% barrier, unbroken for almost 30 years, if policymakers become confident that the country will achieve 2% inflation stably and sustainably.

The central bank's board voted Friday to increase its target for its short-term policy rate to around 0.5% from around 0.25%.

If the BOJ continues to raise the rate, it will become close to the so-called neutral rate of interest, which neither stimulates nor cools the economy.

The BOJ expects to raise the policy rate to the neutral rate, believed to be between 1% and 2.5%, by the end of fiscal 2026. A senior BOJ official has said that the central bank should raise the policy rate to at least 1%.

However, determining the actual neutral rate is difficult. BOJ Gov. Kazuo Ueda has said that the question of when to stop raising rates remains a major challenge.

The BOJ's policy rate last reached 0.5% roughly 18 years ago, arriving at the level after the central bank raised it by 0.25 percentage point each in July 2006 and February 2007, following its lifting of quantitative monetary easing in March 2006.

However, the BOJ resumed quantitative easing following the global financial crisis of 2008, bringing interest rates below zero.

There is scarce empirical data on how the Japanese economy would react to sustained interest rate increases, so the BOJ needs to make any decision while closely monitoring economic and price reactions.

Takahide Kiuchi, executive economist at Nomura Research Institute, estimated that Japan's neutral rate of interest is just shy of 1%, given the country's low potential growth rate.

The BOJ "will have to steer policy carefully, so that there are no negative effects on the economy and prices," Kiuchi said, predicting that the bank will increase the policy rate to 0.75% in the second half of 2025 before ending rate increases.