The yen's interest rate hike expectations support its rise, and USD/JPY faces correction pressure.

The upward interest rate expectations driven by the Bank of Japan are reshaping the yen exchange rate landscape. As the probability of a rate hike in December rises above 80%, market bets on yen appreciation have significantly increased, with USD/JPY briefly falling to 154.66, the lowest in nearly two weeks.

Clear Hawkish Signals from the Central Bank, Rate Hike Imminent

Bank of Japan Governor Kazuo Ueda’s recent statements are interpreted by the market as a strong signal of a rate hike. Phrases like “considering the pros and cons of a December rate increase and making a decision accordingly” are the clearest policy indications to date. Overnight index swap data shows that market expectations for a December rate hike have exceeded 80%.

French Paris Bank economists note that Ueda’s comments are essentially a rate hike warning. Analysts from Barclays and JPMorgan have moved the expected timing of the hike from January to December. However, Goldman Sachs remains cautious, believing the central bank may wait for more comprehensive corporate wage data before acting, with a high probability of a rate increase in January.

Narrowing US-Japan Interest Rate Differential, Carry Trade Faces Closure

Corresponding to the expectations of a BOJ rate hike, market bets on a Fed rate cut in December have risen to nearly 90%. The rapid narrowing of the US-Japan interest rate differential has become a key variable.

When the interest rate gap between the US and Japan shrinks, the profit margin for carry trades—borrowing yen to buy dollars—diminishes. This wave of carry trade unwinding has already manifested in the market, causing the USD/JPY exchange rate to fall. Analysts point out that with rising expectations of a BOJ rate hike, the yen still has upward momentum.

Mitsubishi UFJ Financial Group analyst Lee Hardman forecasts that by early 2026, USD/JPY could further retreat to around 150. This indicates that the yen’s appreciation trend is still ongoing.

Key Factors Investors Should Watch

The movement of the yen exchange rate influences multiple markets. Yen appreciation, on one hand, reduces the attractiveness of carry trades, and on the other hand, alters the allocation strategies of cross-border capital. The final decision on the central bank’s rate hike and the policy direction of the Federal Reserve will be crucial factors in determining the yen’s future trajectory.