The yen strengthened and Japanese government bond yields rose to fresh multi-year highs on Friday after the Bank of Japan hiked interest rates as expected and raised its inflation forecasts, reinforcing views it will push rates up again.

Wall Street stocks retreated Friday as the market's latest rally lost steam, while the yen pushed higher after the Bank of Japan lifted interest rates. In Japan, Tokyo's stock market dropped and the yen rallied after the Bank of Japan lifted borrowing costs to their highest level since 2008 and flagged further increases in the pipeline.

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 decision by the Bank of Japan came Friday at the end of a two-day policy board meeting in Tokyo.