According to sources familiar with the matter, Japan's central bank is leaning toward raising its benchmark interest rate by 25 basis points this month to counter upside price risks, without ruling out the possibility of accelerating the pace of hikes thereafter. Officials are expected to consider lifting the policy rate from 1% at the two-day meeting concluding September 18, the sources said.

They still view inflation risks as tilted to the upside, with services price gains and persistent yen weakness strengthening the case for action. Officials' views on economic developments remain largely aligned with their forecasts. One source noted that no major changes to the current situation warrant a larger hike, such as 50 basis points, thereby reducing the likelihood of an outsized move.

The yen weakened slightly in active trading following the news, as some traders had clearly positioned for greater volatility earlier this week on the back of hawkish remarks from a committee member. The dollar hovered near 157 yen late Thursday afternoon.

The Bank of Japan also recognizes the potential need for additional hikes beyond September, indicating it will flexibly adjust the pace of tightening based on economic conditions and inflation upside risks. This implies the central bank does not rule out a faster trajectory if circumstances demand.

The decision is drawing unusually close attention from Washington. U.S. Treasury Secretary Scott Bessent, during a series of interviews and statements at this week's Group of 20 finance ministers' meeting, repeatedly made clear his desire for Japan to raise interest rates. According to the Treasury Department, Bessent discussed with Bank of Japan Governor Kazuo Ueda "the importance of sound policy to stabilize inflation expectations and avoid excessive currency volatility" in their bilateral talks.

Overnight indexed swap pricing suggests investors are already positioned for a rate move in two weeks. With such elevated expectations, the decision itself could trigger ripples across global financial markets. A hike in September would come just three months after the June increase, marking the shortest interval between hikes under Ueda's tenure.

Bessent's remarks carry added weight after the U.S. and Japan jointly bought yen on July 31, the first coordinated intervention of its kind since 1998, which helped lift the currency from near 40-year lows. Washington's support may make it harder for Prime Minister Shigeru Ishiba's government to pressure the central bank into slowing its pace. Still, Ishiba's preference for loose monetary policy remains a key uncertainty for sustaining a faster tightening cycle.

Following Tuesday's G20 summit, Ueda did little to dampen speculation of a September hike, telling reporters the central bank must consider upside inflation risks in setting policy. Economists surveyed by institutions expect Japan's key inflation gauge to move toward the 3% target in coming months, helped by government subsidies and other measures that have suppressed price growth recently. Weakness in the yen and rising oil prices are adding to inflationary pressures, given Japan's heavy reliance on imports.

Ueda also indicated that data are broadly in line with the bank's expectations, adding there has been no major change in the way future monetary policy will be conducted. This suggests this month's hike is likely to be a conventional 25 basis points. Policy board member Hajime Takata, who dissented in July in favor of raising rates while the committee held steady, said Wednesday that a larger hike was also possible. However, unless circumstances shift significantly, a 50-basis-point move would present a major communication challenge for the Bank of Japan.