The government of Takashima Saimi has softened its stance in support of the Bank of Japan's interest rate hike, with September 18 potentially becoming the earliest action window.

Informed sources indicate that Prime Minister Fumio Kishida's government supports the Bank of Japan's recent interest rate hike, with the next move likely to occur in September or October. The sources added that the central bank's concerns about the depreciation of the yen driving up prices align with the government's desire to enhance the recent effects of U.S.-Japan exchange rate interventions, leading both parties to agree on the necessity of a rate hike in the near future. Although the Bank of Japan has statutory independence in monetary policy, it is expected to maintain close communication with the government regarding economic policy objectives. The Kishida cabinet cannot compel the Bank of Japan to set specific interest rates but can convey signals that may influence its decisions. In an email statement, the Prime Minister's Office said: "We believe that specific monetary policy measures, including interest rate hikes, should be decided by the Bank of Japan." The statement also added that the central bank 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 announcement, the yen rose from around 159.46 to 159.18 against the dollar, while the benchmark 10-year government bond yield edged up slightly. Investors Remain Cautious About Yen Interventions The first joint intervention by the U.S. and Japan to buy yen since 1998 is losing effectiveness. Currently, market expectations are rising that the Bank of Japan will join efforts to support the yenU.S. Treasury Secretary Scott Waller has signaled that such actions are necessary. Bank of Japan Governor Kazuo Ueda mentioned the possibility of accelerating interest rate hikes during a news conference on July 31, following the central bank's decision to hold steady. Later that day, the U.S. and Japan took joint action to intervene in the forex market to support the yen. According to one informed source, the government had already expressed its support for Ueda's hawkish comments at the news conference prior to the July meeting. The sources added that central bank officials still want to assess economic and price developments before making a final decision on the timing of the next interest rate hike, but they have not ruled out the possibility of action in September. As of noon Tokyo time on Thursday, traders estimated a 74% probability that the Bank of Japan would raise rates at its next decision on September 18. For a long time, Fumio Kishida has been perceived as cautious about raising interest rates too high and too quickly, concerned that this could stifle the economic recovery that has excited global investors. Although the central bank has taken action twice since she took office last October, its benchmark interest rate remains at a low level of 1%. A third rate hike would mark the fastest tightening pace in 12 months since 1989, during the peak of Japan's economic asset bubble. The significant interest rate differential between the U.S. and Japan is one factor contributing to the yen's depreciation. The falling yen has exacerbated inflationary pressures, intensifying the cost-of-living crisis that voters want Kishida to address. In recent weeks, government officials have stated their support for the independence of the Bank of Japan, which may signal their openness to further tightening policies. Recently, Minister of Growth Strategy Minoru Kiuchi expressed in an interview on Monday, "We respect the independence of the central bank." The government and the Bank of Japan signed a joint agreement in 2013, committing to work together to promote economic growth. This agreement established the Bank of Japan's 2% inflation target. In the summary of opinions from the Bank of Japan's July meeting, a committee member stated that monetary policy needs to remain flexible. One monetary policy committee member noted that given that the underlying CPI inflation rate is nearing 2%, "it can be considered that the pace of interest rate hikes may exceed market expectations."