The Bank of Japan's rate hike in December remains a mystery. Can the USD/JPY exchange rate stop falling and rebound?

Recently, the Japanese Yen has continued to depreciate, with the USD/JPY briefly surging to a high point. However, as the Japanese government strengthens its stance on exchange rate regulation and the central bank’s rate hike voices grow louder, market expectations are quietly shifting. On November 26, Japanese Prime Minister Fumio Kishida publicly stated that authorities will closely monitor exchange rate fluctuations and are prepared to take “necessary measures” to intervene in the foreign exchange market. This statement immediately sparked widespread speculation in the market—whether the Bank of Japan will accelerate its pace of rate hikes.

Hawkish rate hike expectations intensify, exchange rate trend shows signs of turning

Sources reveal that the Bank of Japan may initiate a rate hike in December. Influenced by hawkish comments, the USD/JPY has significantly retreated from its high levels, even briefly falling below the 156 level as of November 27. This reversal indicates that market expectations of a policy shift by the Bank of Japan are beginning to take effect.

However, the market remains cautious. On December 19, the Bank of Japan will announce its latest interest rate decision. This timing is crucial—since the Federal Reserve’s rate decision will be announced one week before the Bank of Japan’s meeting, the Fed’s stance will directly influence the BOJ’s decision.

The Federal Reserve’s decision will be a key variable

Analysts point out that if the Federal Reserve chooses to keep interest rates unchanged, the likelihood of the Bank of Japan raising rates will increase significantly. Conversely, if the Fed adopts a rate cut, the BOJ is more inclined to hold steady. Recent market surveys show that investors assess the probabilities of the BOJ raising rates in December and January as quite similar, both approaching 50%.

Carol Kong, an analyst at the Commonwealth Bank of Australia, believes: “A cautious Bank of Japan may decide to wait until the parliamentary budget passes before raising rates. Such a delay allows the central bank time to observe the progress of the next round of wage negotiations and avoid premature action that could trigger market turmoil.”

Will the Yen appreciate or depreciate? Investors should beware of reversal risks

Expectations for rate hikes by the Bank of Japan have strengthened, coupled with rising expectations of rate cuts by the Federal Reserve. The US-Japan interest rate differential continues to narrow, increasing the possibility of USD/JPY retreating from its highs. However, the downward pressure on the Yen has not been completely eliminated.

According to Vassili Serebriakov, a foreign exchange strategist at UBS, “Relying solely on a rate hike to reverse the Yen’s trend is difficult unless the BOJ adopts a truly hawkish rate hike policy and commits to continued hikes into 2026 to control inflation. The US-Japan interest rate differential remains large, and volatility is still low, which continues to make arbitrage trading attractive.”

As an asset sensitive to Japan’s economy and exchange rate movements, Japanese gold also faces uncertainty. Yen depreciation generally supports gold priced in USD, but if the BOJ’s rate hike provides substantial support to the Yen, the purchasing power of Japanese gold may need to be reassessed.

Jane Foley, head of FX strategy at Rabobank, pointed out: “There is indeed a possibility of government intervention during Thanksgiving, but if market concerns about intervention are enough to curb the USD/JPY rally, it may reduce the actual need to take action.” This paradoxical logic is at the core of the current market hesitation.

Investors should closely monitor the policy directions of the Federal Reserve and the Bank of Japan, as well as the actual changes in the US-Japan interest rate differential, to accurately grasp the turning points in the Yen exchange rate and related assets.