By Francesco Canepa and Howard Schneider

FRANKFURT/WASHINGTON (Reuters) - Global central banks continued raising interest rates on Thursday, following the U.S. Federal Reserve in a fight against inflation that is sending shockwaves through financial markets and the economy.

Japan, the outlier among major developed economies, kept interest rates steady on Thursday only to be punished as traders pushed the yen to a record low against the dollar - prompting the first intervention by Japanese authorities to support the currency since 1998.

It was a potential sign of a massive adjustment to come as the world adapts to U.S. interest rates rising to levels not seen since the global financial crisis 15 years ago prompted the Fed to slash its policy rate to zero and unleash massive rounds of bondbuying.

That era of cheap liquidity, which lasted through the worst of the coronavirus pandemic and until inflation became a prominent risk, is now ending. U.S. interest rates and the U.S. dollar serve as reference points for borrowing costs around the world, and Federal Reserve officials have now flagged not just plans to continue tightening monetary policy, but to keep it tight for years to come in what may for many countries amount to a fresh financial shock - and a broad repricing of bonds, stocks, and other financial instruments.

The value of the dollar is soaring, helping ease inflation in the United States even as it raises the costs of many dollar-priced imports for other countries, a factor that may have figured into Japan's intervention.

Some analysts feel more is bound to follow.

"Intervening in markets tends to result in...less optimal economic outcomes than would otherwise result," RSM Chief Economist Joe Brusuelas wrote after Japan's action. "But the current inflation shock may outweigh this reluctance. We may be entering an era of intervention in foreign exchange markets."

In the aftermath of the 2007 to 2009 financial crisis, central bankers often accused each other of waging currency wars to cheapen local money to promote exports, an accusation levelled pointedly at the Fed. Inflation may now prompt a similar tension in the other direction.U.S. Treasury officials, who monitor global currency policies closely for signs countries are intervening to gain an advantage, took note of Japan's move on Thursday as an effort to "reduce recent heightened volatility" in the yen, but stopped short of endorsing it.

U.S. Treasury Secretary Janet Yellen, asked in July about the yen's substantial depreciation, said currency intervention was warranted only in "rare and exceptional circumstances."

Though many countries are battling a common inflation outbreak in the aftermath of the COVID-19 pandemic, the Fed's response has stood out both because of the dollar's global role and the aggressiveness of the U.S. central bank.

Fed Chair Jerome Powell, asked about the risks of major central banks shifting monetary policy in unison, said that while the Fed tries to estimate the impact of policy "spillovers" between countries, he and his colleagues had to remain focused on local economic conditions.

"We are very aware of what's going on in other economies around the world and what that means for us and vice versa," Powell said at his press conference on Wednesday after the Fed approved its third consecutive "unusually large" 75 basis point rate increase. But, he said, U.S. officials "have a domestic mandate, domestic objectives" of stable U.S. inflation and maximum employment.

HALF A DOZEN RATE HIKES

The actions by the Fed, along with those of other major central banks, have formed the backdrop for early warnings from international officials and analysts that rising rates for currencies like the dollar and the euro could tighten global financial conditions so much it leads to a global recession.

Along with the Fed's action on Wednesday, its fifth interest rate increase since March, a half dozen central banks from Indonesia to Norway followed suit with their own rate increases and often with guidance that more would follow.

They are fighting inflation rates ranging from Switzerland's 3.5% to nearly 10% in Britain - the result of a rebound in demand since the pandemic subsided accompanied by sluggish supply, especially from China, and rising prices for fuel and other commodities in the wake of Russia's invasion of Ukraine.

Central bankers were adamant that curbing runaway price growth was their main task at present. But they were bracing for their actions to take a toll, as rising borrowing costs typically dampen investment, hiring and consumption.

"We have got to get inflation behind us," Powell told reporters after Fed policymakers unanimously agreed to raise the central bank's benchmark overnight interest rate to a range of 3.00%-3.25%. "I wish there were a painless way to do that. There isn't."

The Fed said it expected the economy to slow to a crawl and unemployment to rise to a degree historically associated with a recession - a prospect looming ever larger in the euro zone too and seen as highly likely in Britain.

The Bank of England raised rates and said it would continue to "respond forcefully, as necessary" to inflation, despite the economy entering recession.

"For borrowers, this will mean significantly higher costs yet again and yet still no real control on the soaring cost of living," Emma-Lou Montgomery, an associate director at Fidelity International said.

World stocks fell close to a two-year low and emerging market currencies plummeted as investors prepared for a world where growth is scarce and credit harder to get. [MKTS/GLOB]

Market participants have also pushed up their rate expectations for the European Central Bank, which is all but certain to hike again on Oct. 23. It is now seen taking its own interest rate to almost 3% next year from 0.75% now.

Japan opted to hold its rates near zero to support the country's fragile economic recovery, but many analysts believe its position to be increasingly untenable given the global shift to higher borrowing costs.

"There's absolutely no change to our stance of maintaining easy monetary policy for the time being. We won't be raising interest rates for some time," Bank of Japan Governor Haruhiko Kuroda said after the policy decision.

But the yen plummeted against the dollar following the decision, forcing Japanese authorities to step in and buy the domestic currency in a bid to stem the slide.

Meanwhile, Turkey's central bank continued with its unorthodox policy on Thursday by delivering another surprise interest rate cut despite inflation running at more than 80%, sending the lira to an all-time low against the dollar.

(Reporting by Francesco Canepa and Howard Schneider; Editing by Hugh Lawson and Andrea Ricci)