Can the USD/JPY sustain its high levels? The Bank of Japan's December rate hike becomes the key!

The market is experiencing a subtle turning point. The momentum of the yen’s depreciation has suddenly been halted, hidden behind changes in policy expectations and reassessment of exchange rate risks.

Booming Expectations of BOJ Rate Hike, USD/JPY Faces Pressure

Recent policy signals have invigorated the market. Japanese Prime Minister Sanae Takashi publicly stated that the government will closely monitor foreign exchange market fluctuations and is prepared to take action if necessary. Subsequently, sources revealed that the Bank of Japan is preparing for a rate hike as early as December.

These hawkish voices have had an immediate effect—USD/JPY has retreated from highs and even briefly fell below the 156 key level as of November 27. This marks the beginning of a rebound in the previously one-sided yen depreciation.

The Fed’s Decision Will Become the “Pointer” for the BOJ

The policy pace in December is becoming particularly important. The Bank of Japan will announce its latest decision on December 19, while the Federal Reserve will announce its stance a week earlier. This time gap means that the Fed’s policy orientation will directly influence the BOJ’s decision.

Market logic is clear: if the Fed holds steady, the BOJ will face pressure to hike; but if the Fed shifts to rate cuts, the BOJ will have ample reason to hold steady.

Currently, market expectations for a BOJ rate hike in December and January are each about 50%, reflecting high uncertainty. Australian Commonwealth Bank analyst Carol Kong believes, “A cautious BOJ may wait until the parliament passes the budget before acting, which would buy time to study wage negotiations.”

Will the Yen Appreciate or Continue to Depreciate? The Key Lies in the US-Japan Interest Rate Differential

In the short term, narrowing the US-Japan interest rate differential indeed increases the probability of a pullback in USD/JPY. But such optimistic expectations may be overly naive.

The pressure for yen depreciation has never truly dissipated because a significant interest rate differential still exists between the US and Japan, and arbitrage trading continues unabated. This means that even if the central bank hikes once, it will be difficult to fundamentally reverse the trend.

UBS FX strategist Vassili Serebriakov pointed out the key issue: “Unless the BOJ adopts a hawkish stance and explicitly commits to further hikes in 2026 to suppress inflation, a single rate hike will have limited effect. The US-Japan interest rate differential remains wide, and volatility is still subdued.”

This implies that the BOJ needs more than just a one-time rate hike; it requires a clear hawkish commitment and a long-term policy framework to truly change market expectations of USD/JPY movement.

The Double-Edged Sword of Policy Intervention Risks

Dutch bank ING’s FX strategist Jane Foley offered an intriguing perspective: “Although intervention may be possible during Thanksgiving, if market expectations of intervention are enough to curb the dollar’s rise, the actual necessity for intervention may decrease.”

This expectation game is precisely where the current market is delicate—policy signals themselves become a driving force in price movements, and actual actions may instead lead to a counter-rally. Investors should be alert to this reversal risk, especially when there is a divergence between policy expectations and actual measures.