Insiders report that the administration of Prime Minister Yoshihide Suga is backing the Bank of Japan to raise interest rates in the near term, with the next move potentially occurring in September or October.

The sources add that the central bank is concerned about the yen's weakness pushing up prices, while the government aims to strengthen the impact of recent joint U.S.-Japan currency intervention, creating alignment on the need for a rate hike. Although the Bank of Japan is legally independent in setting monetary policy, it must maintain close communication with the government on economic policy goals. The Suga administration cannot force the BOJ to set specific rates but can send signals that may influence its decisions.

In an emailed statement, the prime minister's office said, "We believe specific monetary policy measures, including interest rate hikes, should be left to the Bank of Japan's judgment." The statement added that the BOJ should work closely with the government to achieve the 2% inflation target in a "stable manner." The Bank of Japan declined to comment.

Following the news, the yen strengthened against the U.S. dollar, rising from around 159.46 to 159.18, while Japan's benchmark 10-year government bond yield edged up.

The key drivers for accelerated rate hikes

The effect of the first joint U.S.-Japan yen-buying intervention since 1998 has begun to fade. Expectations are growing that the Bank of Japan will also join efforts to support the yen, an approach U.S. Treasury Secretary Scott Bessent has said he believes is necessary. At a press conference on July 31, when the BOJ held steady, Governor Kazuo Ueda mentioned the possibility of speeding up rate hikes and pointed to risks of upward pressure on prices. Later that day, the U.S. and Japan intervened jointly to support the yen.

One of the sources revealed that before the July meeting, the Japanese government had informed the BOJ that it would support the governor if he made hawkish remarks at the post-meeting press conference.

Central bank officials still want to assess economic and price trends before making a final decision on the timing of the next rate hike, but they have not ruled out the possibility of a move in September, the sources added. As of Thursday's Tokyo lunchtime, traders estimated a 74% probability that the BOJ would raise rates at its next policy meeting on September 18.

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Suga has long been seen as cautious about rates rising too high or too fast, fearing it could stifle Japan's economic recovery, which has excited global investors. Since she took office last October, the BOJ has raised rates twice, but the benchmark rate remains at a low 1%. A third rate hike would mark the fastest monetary tightening by the BOJ in 12 months since 1989, during the peak of Japan's asset bubble.

The wide U.S.-Japan interest rate gap is a key factor driving yen weakness. The yen's depreciation exacerbates inflation pressures, worsening the rising cost of living—a problem voters expect the Suga administration to address. In recent weeks, government officials have repeatedly expressed support for the BOJ's independence, possibly signaling openness to further monetary tightening.

Japan's Minister for Economic Revitalization, Minoru Kiuchi, said on Monday, "We respect the central bank's independence." In 2013, the government and the BOJ signed a joint agreement committing to work together to promote economic growth. That agreement also set the BOJ's inflation target at 2%. In the summary of the BOJ's July policy meeting, one committee member noted that monetary policy needs to be more flexible. One of the nine members stated that since core CPI inflation has been consistently near 2%, it can be argued that the pace of policy rate hikes will be faster than the market expects.