The night before the Bank of Japan's decision on December 19, the divergence among the three major institutions on the USD/JPY trend became evident.

The Bank of Japan is set to announce its interest rate decision this Thursday, and the market is eagerly awaiting. While the expectation of a 25 basis point hike to 0.75% is no longer news, the Governor Ueda Haruhiko’s wording and guidance on the future rate hike path are the real key factors that could shake the market.

Market Consensus on Rate Hike Expectations

According to most institutions’ estimates, the Bank of Japan is likely to raise its estimated lower bound of the neutral interest rate from the current 1.0%. This indicates a shift in the central bank’s assessment of the economy. Currently, market pricing suggests that Japanese interest rates could rise to 1.0% by September 2026. However, Nomura Securities has poured cold water on this, considering such expectations overly aggressive.

Remembrance of the July 2024 “Carry Trade Shock”

Half a year ago, the Bank of Japan unexpectedly raised rates to 0.25%, triggering a collective unwind of carry trades. At that time, the USD/JPY exchange rate surged, US stocks and Bitcoin dropped sharply, and the market paid a heavy price for this sudden turn. Many investors still have lingering fears.

However, analysts point out that the impact of this rate hike should be much smaller this time—on one hand, expectations have been fully digested; on the other, Japan is still implementing large-scale fiscal stimulus, which continues to suppress the yen.

Divergence in Top Three Institutions’ Yen Exchange Rate Forecasts for Next Year

Bank of America shows a relatively moderate stance. If the Bank of Japan adopts a dovish rate hike approach, USD/JPY could remain high, possibly surging to 160 in early next year. But if the central bank takes a more aggressive stance, short positions on the yen may be covered, and USD/JPY could retreat to around 150. BofA expects the target price of USD/JPY for 2026 to gradually decline from 160 in Q1 to 155 in Q4.

Nomura Securities appears more bold. The institution points out that rising domestic political pressure from yen depreciation and narrowing US-Japan interest rate differentials will also weaken carry trades. Its forecast shows USD/JPY trending downward—gradually falling from 155 in Q1 2026 to 140 in Q4. This is much more optimistic than BofA’s prediction.

It is worth noting that exchange rate fluctuations will also indirectly impact other emerging markets, such as the USD/PHP exchange rate, which is also worth watching as a barometer of the Asia-Pacific region.

A Critical Moment Approaching

The December 19 interest rate decision is not just a numbers game; it will determine the next direction of global carry trades and influence investors’ asset allocation decisions. Whether the Bank of Japan continues to “hawk” or “dove,” the market is ready to face the answer.