The Japanese Yen exchange rate plummets near the critical point! The central bank's dovish stance triggers intervention expectations

Last Week’s Market Overview: Dollar Strengthening Amid Non-US Currencies Divergence

Last week (12/15-12/19), the global foreign exchange market showed a pattern of dollar strength versus non-US currencies. The US Dollar Index rose by 0.33%, with major non-US currencies showing mixed performance: the euro declined by 0.23%, the Japanese yen dropped sharply by 1.28%, the Australian dollar weakened by 0.65%, and the British pound slightly rose by 0.03%. Among these, the significant fall of the yen became the focus of the week, reflecting the complex interplay between Japanese policies and the global interest rate environment.

Why Did the Yen Plunge? Central Bank Rate Hike Fails to Reverse the Downtrend

USD/JPY surged by 1.28% last week, approaching the 158 level. The main culprit for the yen’s sharp decline was the Bank of Japan’s “moderate rate hike.”

The Bank of Japan raised interest rates as expected by 25 bps, but Governor Ueda Kazuo’s comments leaned towards dovishness, disappointing the market. More critically, Prime Minister Fumio Kishida’s cabinet simultaneously approved a massive fiscal stimulus package worth 18.3 trillion yen. This large expenditure directly offset the tightening effect of the rate hike. The simultaneous implementation of rate hikes and expansionary policies instead heightened market concerns about Japan’s economic difficulties, leading investors to sell off the yen.

Market forecasts suggest that the Bank of Japan will only cut rates once by 2026. Sumitomo Mitsui Banking Corporation warned that the next rate hike might not occur until October 2026, leaving a long time ahead. The bank predicts the yen could further depreciate to 162 in the first quarter.

Government Intervention Imminent? 160 Becomes a Psychological Barrier

JPMorgan issued a warning: if the yen depreciates beyond 160 in the short term (i.e., USD/JPY breaks above 160), it will be classified as a rapid exchange rate movement, and government intervention is highly likely. This could involve verbal warnings or actual purchases of yen to stabilize the exchange rate.

Interestingly, Nomura Securities offered a different view. The bank believes that under the continued rate cuts by the Federal Reserve, the US dollar is expected to weaken in the short term, making it difficult for the yen to continue falling sharply. They forecast the yen could appreciate to 155 in the first quarter. The forecasts from the three institutions differ by 7 points (155-162), reflecting significant market disagreement on the yen’s future trend.

Euro Awaiting Rate Hike Expectations Adjustment

The European Central Bank maintained interest rates as expected last week, with President Christine Lagarde not providing the hawkish signals the market anticipated. Meanwhile, US November non-farm payroll data performed modestly, with November CPI below expectations. However, Morgan Stanley and Barclays warned that these data are affected by technical distortions, raising doubts about their accuracy.

Markets expect the Federal Reserve to cut rates twice in 2026, with a 66.5% probability of a rate cut in April. Danske Bank is optimistic about the euro’s prospects, believing that the Fed’s rate cuts and the ECB holding steady will widen the interest rate differential, coupled with increased risk of a softening dollar, which benefits the euro against the dollar. EUR/USD rose and fell last week, ultimately declining by 0.23%. In the short term, it remains above multiple moving averages, with resistance around 1.18 and support at the 100-day moving average near 1.165.

Key Highlights for This Week

Japanese Yen: Focus on Governor Ueda Kazuo’s speeches and whether Japanese authorities escalate verbal intervention. If comments turn hawkish or intervention intensifies, USD/JPY will face downward pressure. Technically, if USD/JPY breaks below 158, it could trigger an accelerated correction; conversely, a break above 158 could open upward space.

Euro: The US Q3 GDP data will be a key factor. Better-than-expected data will be bullish for the dollar and bearish for EUR/USD; worse-than-expected data will have the opposite effect. Geopolitical developments should also be closely monitored.

In the short term, the reversal of the yen’s sharp decline depends on the strength of government intervention and central bank policy adjustments. Investors should remain alert to these policy variables within this cycle.