Expectations are growing that the Bank of Japan will raise interest rates in September and again in December, accelerating the pace of tightening as the yen weakens and inflation risks build. The BOJ will meet on Sept. 17-18, with Tokyo markets putting the odds of a September increase above 80%. The yen recently approached 164 per dollar, its weakest level since 1986, before joint intervention by the US and Japan briefly pushed it into the 156 range; it has since returned to around 160. Japan’s corporate goods price index rose 7.2% in July from a year earlier, while inflation excluding fresh food and energy accelerated to 1.9%. A faster narrowing of the US-Japan interest-rate gap could support the yen over the medium to long term, although trade and services deficits and overseas securities investment may limit any immediate recovery. Higher Japanese rates would also increase refinancing costs on government debt of about 1,347 trillion yen, with debt-servicing costs projected to reach a record 36.6 trillion yen in fiscal 2027. The policy dilemma is reflected in markets: Japan’s 10-year government bond yield previously reached 2.945%, the highest since September 1996, while Bitcoin rose 22% in seven days to about $77,355. A sharp yen appreciation could also pressure the carry trade and risk assets, as demonstrated by the August 2024 market shock.