Can the Yen's rally continue? Central bank interest rate hike signals trigger intense market debate

The Bank of Japan Governor Kazuo Ueda recently sent the strongest hawkish signal to date, indicating that he will assess the pros and cons of a rate hike in December. This statement immediately ignited market nerves—overnight index swap data shows that the market’s probability of a rate hike by the Bank of Japan in December has surged to over 80%, far exceeding previous conservative estimates.

Meanwhile, USD/JPY fell to 154.66 on December 1, touching a nearly two-week low. This reflects strong investor bets on the yen’s appreciation. Ueda’s remarks were almost interpreted by the market as a preview of a December rate hike, with French Paris Bank economists openly expressing this view.

Market Divergence: Who Decides the Timing of the Rate Hike?

Although expectations for a rate hike are high, analysts’ views on the timing are not uniform. Barclays and JPMorgan have moved up the timing of the central bank’s rate hike from the original January 2025 to December, showing optimism. However, Goldman Sachs has hit the brakes, believing the central bank may still be waiting for more corporate wage data and is inclined to act only in January next year.

Carry Trade Exit, Yen Gains Momentum

Another key factor fueling the yen’s rise is the unwinding of carry trades. Market bets on a Fed rate cut in December have reached nearly 90%, while the Bank of Japan is contemplating a rate hike—narrowing the US-Japan interest rate differential is eroding the foundation of carry trades.

Coin Bureau analyst Nic Puckrin pointed out that fluctuations in the yen exchange rate are once again disrupting market sentiment, with a large volume of yen arbitrage trades exiting. Mitsubishi UFJ Financial Group analyst Lee Hardman further predicted that as expectations for a rate hike continue to heat up, the yen’s rally may persist, with USD/JPY expected to fall toward 150 in early 2026.

Future Outlook: Is There Still Room for Yen Appreciation?

As the dual forces of interest rate expectations and trade unwinding combine, yen appreciation may become the short-term market theme. However, investors should remain alert, as the final decisions on central bank policies, the release of corporate wage data, and changes in the global economic situation could rewrite the script for yen gains.