Yen depreciation dilemma awaits resolution: Can the Bank of Japan's December rate hike turn the tide?

Expectations of Rate Hikes by Central Banks Rise, Exchange Rate Trends Under Observation

The policy pace of the Federal Reserve and the Bank of Japan has become the focus of the current foreign exchange market. The Bank of Japan will announce its interest rate decision on December 19, while the Federal Reserve’s decision will be announced a week earlier. Market consensus is that the Federal Reserve’s policy stance will directly influence the Bank of Japan’s decision to raise rates. If the Federal Reserve chooses to maintain interest rates, the pressure on the Bank of Japan to hike will increase; conversely, if the Fed initiates a rate cut, the Bank of Japan is more likely to hold off on policy adjustments.

According to the latest market survey, investors’ expectations of the Bank of Japan raising rates in December and January are both around 50%. Commonwealth Bank of Australia analyst Carol Kong believes that the cautious Bank of Japan may wait until the parliamentary budget bill is passed before acting, which could help delay the impact of rate hikes and give the central bank time to observe new developments in wage negotiations.

Yen Depreciation Pressure Remains, Policy Interventions Frequently Occur

In late November, Japanese Prime Minister Fumio Kishida announced that the government would closely monitor exchange rate fluctuations and prepare to take “necessary” actions in the foreign exchange market. Subsequently, market rumors suggested that the Bank of Japan was preparing for a possible rate hike, causing the USD/JPY to sharply retreat from its high point, briefly falling below the 156 level.

However, the fundamental pressure for yen depreciation has not truly dissipated. UBS forex strategist Vassili Serebriakov pointed out that the Japan-U.S. interest rate differential remains high, and arbitrage trading continues, making it difficult for a single rate hike to significantly change the long-term trend of the yen. He emphasized that unless the Bank of Japan adopts a sustained hawkish rate hike strategy and explicitly commits to continuing rate hikes into 2026 to address inflation, the rebound space for the yen will be limited.

Rate Hike Expectations vs. Actual Interventions — Market in Wait-and-See Mode

Jane Foley, Head of FX Strategy at Rabobank, proposed an interesting market paradox: the threat of government intervention itself may suppress the dollar-yen appreciation, thereby reducing the need for actual intervention. This indicates that market expectations have already priced in some risk of intervention.

The large interest rate differential between Japan and the U.S., along with low volatility, determines the persistence of the yen’s depreciation trend. Although short-term rate hike expectations and policy intervention signals provide the yen with some breathing room, a genuine yen appreciation will require more aggressive policy combinations and cooperation from the international economic environment. Investors should closely monitor the December central bank decisions and the Federal Reserve’s direction, as these will be key factors in whether the yen’s depreciation trend can be reversed.