Japan’s central bank has raised its main interest rate to the highest level in 30 years as the country faces a cost-of-living squeeze.

In a widely expected decision, the Bank of Japan’s policy board, led by governor Kazuo Ueda, increased its benchmark rate by a quarter of a percentage point to “around 0.75%” on Friday.

The move comes as new Prime Minister Sanae Takaichi is keen that inflation comes down but also needs the cost of government borrowing to be cheap.

It marks both the first time the BOJ has hiked rates since January and the first rise since both Takaichi and Ueda took up their current roles.

When a central bank raises interest rates it tends to have the effect of increasing the value of the country’s currency.

In Japan’s case, it has the potential of easing inflation as the yen’s low value versus other major currencies, like the US dollar and the euro, has pushed up the cost of imports, which in turn has helped to fuel inflation.

At the same time, higher interest rates push up government borrowing costs because when rates go up governments, like anyone else, have to pay more to borrow money.

Last year, Takaichi described the idea of a rate hike as “stupid” although she has not publicly criticised Ueda’s policies since she took office in October.

Still, Takaichi has made the fight against inflation a priority as rising costs have eroded support for her party, the LDP.

On Friday, official figures showed Japan’s inflation, excluding food and fuel, rose by 3% in November. That remains above the bank’s target rate of 2%.

But Shoki Omori, chief strategist at Mizuho in Tokyo, told the BBC that the interest rate rise will do little to ease inflation as it has already been priced in by currency markets and the yen remains relatively weak.

Most economists expect the BOJ to raise its benchmark interest rate once more next year to hit 1%.

It marks a major change in Japanese policy makers’ approach to interest rates.

“What we’re seeing is a historic shift after nearly three decades of long standing low rates in Japan,” said Julia Lee from Pacific FTSE Russell, part of the London Stock Exchange Group.

But Takaichi’s stance on monetary policy may make it harder for the bank to hike again, said Shigeto Nagai, head of Japan economics at Oxford Economics.

“The BoJ will need time, probably around six months, to monitor the impact of the rate hike on the real economy before it makes its final move,” he said.

The BOJ’s latest rate rise comes as other major central banks around the world are moving in the opposite direction – lowering the cost of borrowing.

On Thursday, the Bank of England cut its main interest rate to 3.75%, the lowest level since February 2023.

Last week, the US Federal Reserve lowered interest rates for the third time this year, even as internal divisions create uncertainty about additional cuts in the coming months.

The central bank said it was lowering the target for its key lending rate by 0.25 percentage points, putting it in a range of 3.50% to 3.75% – its lowest level in three years.

Japan’s inflation rate held steady in November, official data showed Friday ahead of the Bank of Japan’s monetary policy decision which could see central bankers raise interest rates to their highest level in 30 years.The hike would be the first since January and could potentially exacerbate turmoil in debt markets.Yields on Japanese government bonds have risen in recent weeks on worries about Prime Minister Sanae Takaichi’s budget discipline, while the yen has weakened.The core consumer price index — which excludes volatile fresh food — rose three percent in November, the same rate as a month earlier, in line with market expectations.Takaichi, who formally took power in October, has promised to fight inflation as a major priority.Her government succeeded in getting parliament approval for an extra budget worth 18.3 trillion yen ($118 billion) this week to finance her massive stimulus package.She has long advocated for more government spending and easy monetary policy to spur growth.Since taking office, however, she has said monetary policy decisions should be left to the Bank of Japan (BoJ).The BoJ began hiking rates from below zero in March last year as figures signalled an end to the country’s “lost decades” of stagnation, with inflation surging.However, with worries about the global outlook and US tariffs growing, the bank paused its tightening measures at the start of 2025, with the last increase in January taking rates to their highest level in 17 years.The inflation figures for November showed rice prices up 37 percent year-on-year, the internal affairs ministry said. Rice prices have skyrocketed because of supply problems linked to a very hot summer in 2023 and panic-buying after a “megaquake” warning last year, amongst other factors.Japan’s economy contracted 0.6 percent in the third quarter, but BoJ governor Kazuo Ueda said last week that the impact of US tariffs was less than feared.“So far, US corporates have swallowed the burden of tariffs without fully passing (them) through to consumer prices,” Ueda told the Financial Times.At the same time, inflation has been above the BoJ’s target of two percent for some time.The majority of economists polled by Bloomberg expect the BoJ to raise its main rate from 0.5 percent to 0.75 percent, which would be the highest since 1995.