The Japanese Yen interest rate hike is imminent! USD/JPY surges to 157.78, with three major risks brewing

The Bank of Japan Policy Board member Junko Koeda recently hinted that the earliest possible start of interest rate hikes for the yen could be as soon as next month (the Bank of Japan’s rate decision will be announced on December 19), signaling that the “normalization” process is now unavoidable. At the same time, the market is filled with doubts about the new Japanese Prime Minister Sanae Takaichi’s upcoming economic stimulus plan, and investors are testing the waters between these two forces.

Exchange Rate Breaks New Highs, but RSI Has Sounded the Alarm

The USD/JPY trend says it all. On Thursday (November 20), the cross rose to a high of 157.78, reaching a new high since mid-January, just one step away from the 158.0 psychological level. The 10-year Japanese government bond yield also climbed to 1.842%, with signs of investors selling Japanese bonds and yen becoming more evident.

From a technical perspective, the RSI on the daily chart has entered overbought territory, indicating that the exchange rate is accelerating upward. If USD/JPY can stabilize above 157.0, further rebounds toward 160.0 are expected. The market should pay special attention to the time window around November 27, as this period may present a turning point.

Contradiction Between Weak Economic Data and Yen Rate Hike Expectations

A seemingly contradictory set of economic data is intensifying market anxiety. On Monday (November 17), Japan’s Q3 GDP growth rate was revised down to -1.8% quarter-on-quarter, marking the first negative growth in six quarters. Facing such weak economic growth, the Takaichi government plans to announce an economic stimulus package on Friday, considering an additional budget of about 14 trillion yen for this fiscal year, possibly exceeding last year’s 13.9 trillion yen.

The market initially bet that the BOJ might delay interest rate hikes to coordinate with the new Prime Minister’s stimulus policies. However, Japan’s key inflation indicators have remained near or above the BOJ’s target level for three and a half years in a row, and real wages in September declined for the ninth consecutive month, highlighting the pressure on household purchasing power. Japanese Finance Minister Shunichi Kato has repeatedly issued verbal warnings, emphasizing concerns over the recent one-way and rapid fluctuations in the currency market, stating that currency stability reflecting fundamental factors is crucial.

Multiple Institutions Warn: Triple Kill Risks Rise

RBC BlueBay Asset Management Chief Investment Officer Mark Dowding said that if Takaichi’s policy credibility is damaged, it could lead investors to start selling all assets. “If the market perceives increased doubts about Japan’s policy mistakes, we will definitely increase short positions on the short end of the curve,” implying that the firm might deploy strategies such as shorting short-term bonds.

T&D Asset Management’s Chief Strategist Hiroshi Miga also bluntly stated that a stimulus scale of 25 trillion yen is indeed large, and the market is questioning whether it is really necessary. He worries that after the stimulus plan is announced, a “triple kill” of stocks, bonds, and currencies could occur, similar to the market turmoil when Liz Truss took office in the UK in 2022.

TDSecurities Singapore Macro Strategist Alex Loo also shares a similar view, believing that if Takaichi proposes a “large-scale budget,” Japanese long-term government bond yields could further rise, and the yen against the dollar might depreciate toward 160.

Hidden Risks of Yen Depreciation—Inflation Spiral Taking Shape

What is even more concerning is that the continued weakening of the yen could further increase domestic inflationary pressures in Japan, forming a negative feedback loop. On one hand, expectations of interest rate hikes are rising, while on the other hand, weak economic data require stimulus policies for support. This policy dilemma is trapping investors in ongoing risk assessments.

The next focus points are clear: details of Japan’s Friday economic stimulus plan, the BOJ’s December 19 rate decision, and the technical turning point window around November 27. With these three factors overlapping, the game between yen rate hikes and exchange rate volatility has just begun.