The government of Prime Minister Yoshihide Suga is reportedly signaling strong support for the Bank of Japan to raise interest rates again in the near term, with markets widely expecting the next move to come in September or October this year. This shift in stance reflects a growing consensus between the government and the central bank on tackling the yen's depreciation.

The yen's persistent weakness has driven up import costs, intensifying domestic price pressures. The government hopes that monetary tightening will help cement the gains from the recent coordinated U.S.-Japan currency intervention. Although the Bank of Japan has legal independence on monetary policy, a 2013 joint agreement requires the central bank to maintain close communication with the government to ensure policy coordination. While the cabinet cannot directly intervene in the rate-setting process, its policy signals often sway the central bank's final decisions.

In response to these reports, the Prime Minister's office stated via email that specific monetary policy tools should be left to the central bank's discretion, while emphasizing the need for the Bank of Japan to cooperate with the government to achieve the 2% inflation target in a "stable" manner. The Bank of Japan declined to comment.

The interest rate gap between Japan and the United States remains the core issue for the yen's trajectory. Despite the first joint yen-buying intervention by Japan and the U.S. since 1998, its impact has been fading over time. Amid this backdrop, market calls for the Bank of Japan to follow through with rate hikes are growing louder. U.S. Treasury Secretary Janet Yellen has also hinted that coordinated monetary policy is crucial for stabilizing currency markets.

Bank of Japan Governor Kazuo Ueda delivered a rare hawkish signal after the July 31 meeting, hinting at a faster pace of rate hikes. Reports indicate that before the July meeting, the government had clearly communicated its support for Ueda to guide market expectations through public statements. Subsequent market developments confirmed this logic: on the day Ueda turned hawkish, the U.S. coordinated with Japanese authorities to intervene in the currency market.

While Prime Minister Yoshihide Suga has been cautious about rapid rate hikes since taking office in October, fearing it could stifle the fragile economic recovery, the current cost-of-living crisis has become a key voter concern. If the Bank of Japan delivers its third rate hike this autumn, the pace of tightening would be the fastest since the peak of the "bubble economy" in 1989.

Japan's Minister of State for Economic Growth, Takashi Uto, said in an interview that the government's proactive fiscal policies will have a positive impact on the economy and the yen, reiterating the government's "respect for the central bank's independence." Market sentiment has clearly shifted. As of Thursday midday, swap traders placed a 74% probability on a rate hike at the Bank of Japan's September 18 meeting. Board members are also signaling, with one member stating in the July meeting summary that given core CPI is nearing 2%, the pace of policy rate increases "could be faster than the market expects."