The yen strengthened on Friday as speculation grew that the Bank of Japan could raise interest rates in the coming months, pushing the currency toward a closely watched threshold.

The Japanese yen gained as much as 0.2% against the US dollar, reaching 159.15, pulling back from the critical 160 level that traders fear could trigger government intervention to prop up the currency. Citing sources familiar with the matter, a media report on Thursday revealed that Prime Minister Takashi's administration supports the Bank of Japan in raising rates in the near term, with the next move potentially coming in September or October. A separate report on Friday indicated the central bank is considering a rate hike as early as September.

The yen has given back most of the gains it made following joint US-Japan intervention last month, as investors have resumed building carry trades that use the yen as a funding currency. The currency remains under pressure from the wide interest rate differential between Japan and other major economies, compounded by persistent concerns over the nation's fiscal outlook. Overnight index swaps now reflect an approximately 80% probability of a rate hike by September, while an October move is fully priced in by the market.