Sanae Takaichi government opens up to supporting Bank of Japan rate hike, September 18 may be the earliest window for action

According to Golden Ten Data, sources have revealed that the government led by Prime Minister Sanae Takaichi supports a recent rate hike by the Bank of Japan, with the next move likely to occur in September or October.

Sources added that the central bank's concern over the weakening yen driving up prices matches the government's desire to enhance the effectiveness of recent USD/JPY exchange rate interventions, and both sides have reached consensus on the necessity of a near-term rate hike.

Although the Bank of Japan has statutory independence over monetary policy, it is also required to maintain close communication with the government regarding economic policy objectives. The Takaichi cabinet cannot force the Bank of Japan to set specific interest rates, but it can send signals that may influence its decision-making.

The Prime Minister's Office stated in an email: "We believe that specific monetary policy measures, including rate hikes, should be decided by the Bank of Japan." The statement 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 this news, the yen appreciated against the dollar from around 159.46 to 159.18, while the benchmark 10-year government bond yield rose slightly.

Investors remain alert to yen interventions

Since the first joint USD/JPY intervention to buy yen in cooperation with the US since 1998, the effect has been fading. Now, the market’s expectation for the Bank of Japan to join efforts supporting the yen is rising—U.S. Treasury Secretary Scott Besant has signaled that such a move is necessary.

Bank of Japan Governor Kazuo Ueda, during the July 31 post-meeting press conference, mentioned the possibility of speeding up rate hikes due to concerns over risks from rising price pressures. Later that day, the US and Japan launched a joint action to support the yen in the currency market.

According to one source, before the July meeting, the government had already expressed support for Ueda to deliver hawkish remarks at the press conference.

Sources also said Bank of Japan officials still want to assess developments in the economy and prices before making a final decision on the timing of the next rate hike, but have not ruled out action in September. As of Thursday midday Tokyo time, traders put the odds of a Bank of Japan rate hike at its next decision on September 18 at 74%.

For a long time, Sanae Takaichi has been seen as cautious towards raising rates too rapidly or too high, fearing it would stifle the economic recovery exciting global investors. Although the Bank of Japan has taken action twice since her appointment in October last year, its benchmark rate remains at a relatively low 1%.

A third rate hike would mark the fastest pace of tightening by the central bank within a 12-month period since 1989, when the country’s economic asset bubble peaked.

The sizeable interest rate gap between the U.S. and Japan has been one factor causing the yen’s weakness. Depreciation of the yen has intensified inflationary pressures and worsened the cost of living crisis that Sanae Takaichi’s voters are eager to see addressed.

Government officials have stated in recent weeks that they support the Bank of Japan’s independence, which may signal openness to further tightening. Recently, Minister for Growth Strategy Minoru Kiuchi said in an interview on Monday: "We respect the central bank’s independence."

The government and the central bank signed a joint agreement in 2013 pledging to work together to promote economic growth. The agreement established the Bank of Japan’s 2% inflation target.

In the summary of opinions at the Bank of Japan’s July meeting, one policy board member said monetary policy needs to retain more flexibility.

One member of the monetary policy committee pointed out that, since the underlying CPI inflation rate is close to 2%, "it can be considered that the pace of policy rate hikes will be faster than market expectations."