Is the Bank of Japan's interest rate hike a certainty? How will the December decision influence the future trend of the 1100-point level of the Japanese Yen

The Bank of Japan Governor Kazuo Ueda’s recent statements have been interpreted by the market as the strongest hawkish signal. Overnight index swap data shows that the probability of a rate hike in December has risen to over 80%, far exceeding previous market expectations. This shift also drove the USD/JPY to fall to 154.66 in early December, hitting a nearly two-week low.

The Internal Logic of Rate Hike Expectations and Exchange Rate Trends

Ueda stated that he will conduct a comprehensive assessment of the pros and cons of a December rate hike, which caused significant ripple effects in the market. Several investment banks subsequently adjusted their forecasts, moving the timing of the rate hike from January next year to December. Economists at BNP Paribas pointed out that this speech was almost equivalent to a pre-announcement of action in December. Analysts at Barclays and JPMorgan Chase also concurred with this judgment.

However, Goldman Sachs remains cautious, believing that the central bank may need to observe more corporate wage data before making a decision, thus leaning towards keeping the rate hike in January next year. This divergence reflects different interpretations of subsequent developments in the market.

Narrowing of the US-Japan Interest Rate Differential Triggers Carry Trade Liquidation

Corresponding to the rising expectation of a rate hike by the Bank of Japan is the market’s bet that the Federal Reserve will cut rates in December, which has also risen to nearly 90%. The divergence in policy directions between the two central banks is narrowing the interest rate gap, creating pressure for investors engaged in carry trades that rely on borrowing in yen.

When the emerging strategy of borrowing yen to buy dollars becomes less attractive, a wave of large-scale liquidation ensues. Researchers at blockchain analysis firms pointed out that yen arbitrage trading is restarting its liquidation process, which will directly push up the yen exchange rate. The unwinding of carry trades often results in a short-term sharp appreciation of the yen.

Can the Yen’s Uptrend Continue Toward the 1100 Level?

As rate hike expectations strengthen, the yen is gradually shifting from an undervalued currency to a relatively strong asset. According to analysts at Mitsubishi UFJ Financial Group, the USD/JPY may test the 150 level in early 2026, implying that the yen will appreciate further from its current level.

If the rate hike expectations are confirmed, the yen’s appreciation will be further reinforced. Especially with the wave of carry trade liquidations, the yen exchange rate could see even steeper gains in the short term. Integer levels like 1100 often carry technical support and market psychological expectations. If the yen continues to appreciate, it could impact various positions that rely on yen depreciation.

The market is currently at a critical point of policy shift, and the December BOJ decision will be a key moment in determining the future trajectory of the yen exchange rate.