As the Bank of Japan's interest rate hike approaches, the Federal Reserve's rate cut path may be reshaped. The Bank of Japan (central bank) is increasing expectations of rate hikes, which could reshape the Fed's rate cut trajectory through global capital flows, unwind of carry trades, and policy game-playing, thereby intensifying financial market volatility. The following analyzes this dynamic from multiple perspectives:

1. Japan's rate hike expectations strengthen alongside the current Fed rate cut stance
The Bank of Japan has explicitly signaled an interest rate hike, with Governor Ueda Kazuo stating that they will weigh the pros and cons of a rate increase at the December policy meeting. The market expects a high probability of a rate hike on December 18, potentially raising short-term interest rates from 0.50% to 0.75%, or even multiple hikes in the future. Meanwhile, the Fed cut interest rates by 25 basis points to 3.5%-3.75% on December 10 to address a softening labor market and debt pressures, but internal disagreements remain, with Powell emphasizing that inflation risks are tilted to the upside. This policy divergence stems from fundamental differences in the US and Japanese economies: the US faces high debt costs (federal debt exceeding $36 trillion) and stagflation risks, while Japan is driven by persistent inflation (core CPI exceeding 2% for 41 consecutive months) and rising wages.

2. How Japan's rate hikes could reshape the Fed's rate cut path
Japan's rate hikes may influence Fed decisions through the following mechanisms:

- Unwinding of carry trades triggers liquidity crises: The global scale of yen carry trades is substantial (approximately $19.2 trillion). An interest rate hike in Japan would compress interest rate differentials, triggering capital repatriation and yen appreciation, leading to the sale of dollar assets. If combined with a Fed rate cut, this could create a "double squeeze"—rising financing costs and declining investment returns—intensifying global liquidity tensions and forcing the Fed to adjust its rate cut pace to alleviate market panic.