The Japanese Yen exchange rate hits a new low of 154, and the Bank of Japan's interest rate hike signals trigger a market upheaval

USD/JPY fell to 154.66 on December 1, hitting its recent lowest level. The driving force behind this is the strong hawkish signal released by Bank of Japan Governor Kazuo Ueda — he stated that he will carefully assess the pros and cons of a rate hike in December. This statement triggered market expectations, with overnight index swaps showing that the market’s bet on a BOJ rate hike in December has surpassed 80%.

Ueda Kazuo’s “Forecast” Sparks Multiple Interpretations

This time, the central bank governor’s remarks have elicited different reactions on Wall Street. Economists at Crédit Agricole Paris Bank directly stated that Ueda Kazuo’s speech is almost equivalent to announcing that a December rate hike is a done deal. Analysts from Barclays and J.P. Morgan also significantly moved up the timing of the rate hike from the originally scheduled January 2026 to December.

However, not all voices are optimistic. Goldman Sachs maintains a cautious stance, believing that the BOJ may still need to observe more corporate wage growth data, and the probability of a rate hike in January 2026 remains higher.

Narrowing US-Japan Interest Rate Differential and the Yen’s New Face

Contrasting sharply with the rising expectations of a BOJ rate hike is the market’s reversal in attitude toward the Federal Reserve. The bet on a Fed rate cut in December has risen to nearly 90%, directly impacting the interest rate gap between Japan and the US.

The chain reaction caused by the narrowing interest rate differential is a large-scale unwinding of “carry trades.” In the past, investors habitually borrowed low-interest-rate yen to buy high-interest-rate dollar assets for arbitrage. Now, with the possibility of a BOJ rate hike and a Fed rate cut, this yen-borrowing to buy dollars arbitrage space is being squeezed. Coin Bureau analyst Nic Puckrin pointed out that yen carry trades are restarting their exit mode, and this wave of unwinding is pushing up the yen exchange rate.

How Long Can the Yen’s Appreciation Trend Last?

Mitsubishi UFJ Financial Group analyst Lee Hardman predicts that as rate hike expectations continue to heat up, the yen will continue its upward momentum in the short term. His target is for USD/JPY to fall toward 150 in early 2026. Compared to the current level of 154.66, the upside potential is limited but the trend is clear.

Overall, the recent rebound in the yen exchange rate is primarily driven by changes in central bank policy expectations and the unwinding of carry trades. The future direction will depend on whether the BOJ actually implements a rate hike in December and the subsequent policy stance of the Federal Reserve.