TOKYO — Japan’s central bank could raise interest rates as early as this month, according to Takuji Aida, an economic adviser to Prime Minister Sanae Takaichi, adding fresh momentum to expectations that policymakers are preparing to tighten monetary policy.

Aida, who has previously been known for opposing rapid rate increases, has moved his forecast forward and now expects the Bank of Japan (BOJ) to raise its policy rate in September. He also sees additional increases at roughly quarterly intervals through January 2027.

September Seen as a Narrow Policy Window

Aida said September could provide an important opportunity for the BOJ to act before Japan’s parliament begins an extraordinary session in early October.

The parliamentary session is expected to address several economic measures promoted by the Takaichi government, including legislation related to a proposed two-year suspension of an 8% levy on food products.

The timing could make the September 17-18 BOJ meeting particularly important for financial markets.

Markets Expect a 25-Basis-Point Increase

Investors have increasingly positioned for another BOJ increase.

Market pricing has put strong odds on a 25-basis-point move, which would take the central bank’s policy rate to around 1.25%. A Reuters poll conducted earlier in August had already shown economists expecting a September increase, reflecting concerns about inflation and persistent pressure on the yen.

A September move would represent another step away from Japan’s long period of exceptionally loose monetary policy.

Yen Weakness Remains a Major Concern

Japan has been struggling with substantial pressure on its currency.

The yen previously fell toward four-decade lows against the U.S. dollar, prompting Japanese and U.S. authorities to conduct a rare coordinated currency intervention. The operation helped stabilize the currency, but underlying concerns about the yen’s value have remained.

A weaker yen makes imported goods and energy more expensive, increasing pressure on Japanese households and businesses.

Inflation Changes the Policy Debate

For years, Japan’s central bank faced the opposite problem: persistent deflation and weak price growth.

The situation has changed considerably.

Inflationary pressure, higher import costs and currency weakness have made policymakers increasingly concerned that keeping borrowing costs too low could intensify price pressures.

Aida’s shift is notable because he has traditionally been associated with reflationary policies and resistance to aggressive monetary tightening. His latest forecast therefore signals how significantly the policy debate has changed.

More Rate Hikes Could Follow

Aida does not expect a September increase to be a one-time move.

He projects quarterly increases through January 2027 before a slower pace of adjustments thereafter. His forecast suggests that the BOJ could gradually move interest rates higher if inflation and currency pressures remain persistent.

However, he has also warned that moving too quickly could damage economic activity, meaning the central bank would need to balance inflation control against growth.

Government Cannot Direct the BOJ

Despite growing political interest in a stronger yen and tighter monetary conditions, Japan’s central bank retains independence over interest-rate decisions.

Finance Minister Satsuki Katayama has emphasized that monetary policy remains the responsibility of the BOJ. Prime Minister Takaichi has also not publicly committed to a specific rate decision.

That distinction is important because government preferences can influence expectations, but the final decision rests with the central bank’s policy board.

Global Pressure Is Also Building

Japan’s monetary policy is being watched closely outside the country.

U.S. Treasury Secretary Scott Bessent has called for Japan to take stronger action on interest rates, particularly as currency weakness and inflation remain concerns.

At the same time, Japan’s government is pursuing expansionary fiscal measures designed to support households and economic growth. The combination of higher government spending and tighter monetary policy creates a complicated policy environment for Tokyo.

Bond Markets Are Sending a Warning

Japanese government bond yields have also risen sharply as investors anticipate further rate increases and question the country’s fiscal outlook.

The 10-year Japanese government bond yield recently reached around 3%, its highest level in roughly three decades. Higher yields increase borrowing costs for the government and can influence mortgage, corporate financing and investment conditions across the economy.

What the BOJ Could Do Next

The September meeting will therefore be closely watched by investors, businesses and policymakers.

A rate increase could strengthen the yen by narrowing the gap between Japanese and overseas interest rates. It could also help contain inflation, particularly if currency weakness has been contributing to higher import costs.

But higher borrowing costs could weigh on consumer spending, corporate investment and government finances.

A New Phase for Japan’s Monetary Policy

Japan is moving through a significant transition in economic policy.

The country is attempting to maintain economic growth and protect households while dealing with inflation, currency volatility and rising government borrowing costs.

Aida’s latest forecast adds to the growing expectation that the BOJ will continue normalizing monetary policy.

If the central bank raises rates in September and follows with additional increases through early 2027, Japan could enter a markedly different interest-rate environment from the one that defined much of the previous decade.

For now, investors are waiting for the BOJ’s September meeting, while the yen, Japanese bond yields and inflation data will remain critical indicators of whether policymakers have room to tighten further.