Japan Backs BOJ Rate Hike in September or October to Defend Yen

Japan’s government supports an early interest-rate increase by the Bank of Japan, according to people familiar with the matter.

Bloomberg reported on Aug. 13 that Prime Minister Sanae Takaichi’s government is receptive to an earlier BOJ rate hike, with September or October emerging as the leading candidates for the next move.

The BOJ is concerned that yen weakness is lifting import prices and adding to inflationary pressure. The government also sees a need to reinforce the impact of its recent yen-buying intervention with the U.S., bringing the two sides closer in support of an early rate increase.

The prime minister’s office said, however, that specific monetary policy tools, including rate increases, should be left to the BOJ’s judgment. It added that the central bank should work closely with the government to achieve its 2% inflation target in a stable manner.

After the report, the yen strengthened, with the dollar-yen exchange rate falling to 159.18 from about 159.46. Japan’s 10-year government bond yield also edged higher.

The U.S. and Japan jointly intervened to buy yen late last month for the first time since 1998, but the effect faded quickly. That has fueled market expectations that the BOJ will bolster the currency through a rate increase.

BOJ Governor Kazuo Ueda also signaled on July 31 that the pace of future rate increases could accelerate after keeping the policy rate unchanged at 1% and citing upside risks to prices. The report said the Japanese government had conveyed support ahead of that meeting for Ueda to strike a hawkish tone at his press conference.

The BOJ plans to make a final decision after reviewing additional economic and inflation data, though it has not ruled out a move in September. Markets are currently pricing in about a 74% chance of a rate increase at the BOJ’s Sept. 18 meeting.

If the BOJ raises rates again in September or October, it would mark the third increase since Takaichi took office as prime minister. Three rate hikes within 12 months would also amount to Japan’s fastest pace of monetary tightening since 1989, when the country’s asset bubble peaked.