The Japanese yen remains within striking distance of a key psychological threshold against the US dollar, even as reports suggest that Prime Minister Shigeru Ishiba's administration supports a potential interest rate increase. The yen edged lower on Thursday, dipping to 159.56 per dollar during New York afternoon trading, a level that has historically triggered intervention to curb further depreciation.

According to sources familiar with the matter, the Bank of Japan is considering a rate hike in either September or October. The sources added that the central bank is concerned about the yen's weakness pushing up import costs, while the government seeks to reinforce the impact of recent coordinated intervention efforts with the US. This alignment of concerns has reportedly brought both parties closer in their stance on the need for near-term monetary tightening.

Investors, however, have shown little reaction to the news, as the market had already priced in expectations of a BOJ rate hike. The yen has continued to weaken in recent days, weighed down by the persistent interest rate differential between Japan and the US, along with Japan's substantial public debt burden. Masayuki Nakajima, a senior strategist at Mizuho Bank, noted that the market's focus has shifted from whether the BOJ will hike in September to the pace of tightening thereafter.

Meanwhile, Japan's 10-year government bond yield edged up to 2.87% on Thursday, remaining near the 30-year highs touched last month. In a statement sent via email, the Prime Minister's Office said, "We believe that specific monetary policy measures, including interest rate hikes, should be left to the BOJ's discretion."

Howard Du, a strategist at TD Securities in New York, commented that for the yen to gain more sustainable upward momentum, the BOJ's policy guidance needs to influence the market's overall view of the entire rate hike trajectory, rather than just expectations for a single meeting. Speculative traders have already reduced their bearish bets against the yen. Data from the US Commodity Futures Trading Commission for the week ending August 4 showed that hedge funds halved their short yen positions following coordinated actions by Japanese and US officials to stabilize the currency.

This marks a sharp contrast from late June, when these funds held the largest net short yen position since 2007. They have not held a net long position in the yen for over a year. Francesco Pesole, a strategist at ING, said that while he expects the yen to fall back to at least 160 per dollar, a reduction in market expectations for future US rate cuts could provide support for the yen in the coming weeks. "In my view, the current issue is that the market's expectations for the Federal Reserve are still too hawkish," he added.