Is the Yen's trend about to turn? The Bank of Japan's rate hike expectations are rising, with USD/JPY heading straight for the 160 level

Japan's monetary policy shift is imminent. This week, BOJ Policy Board member Junko Koide sent a clear signal, hinting that the rate hike could be initiated as early as the December policy meeting, marking an unstoppable move toward "normalization." Simultaneously, the government’s new Prime Minister, Sanae Takaichi, plans to announce a massive economic stimulus package this Friday, proposing an additional budget of approximately 14 trillion yen, surpassing last year's 13.9 trillion yen.

This combination is causing waves in the market. Investors face uncertainty about the policy direction—will the rate hike be delayed by stimulus measures? Such concerns are leading to continued selling of Japanese bonds and the yen. On November 20, the yield on Japan’s 10-year government bonds rose to 1.842%, and USD/JPY surged to a nearly ten-month high of 157.78, just one step away from the 158.0 threshold.

Fundamentally, the case for raising rates is strong. Japan’s core inflation indicators have remained near or above the BOJ’s target for three and a half years, yet real wages in September declined for the ninth consecutive month, reflecting ongoing pressure on household purchasing power. The yen’s depreciation is likely to further increase domestic price pressures, creating a vicious cycle.

Policy makers are well aware of this. Finance Minister Shunichi Suzuki has repeatedly warned about the recent one-way and rapid fluctuations in the forex market, emphasizing the importance of exchange rate stability aligned with fundamentals. These statements are effectively paving the way for the BOJ’s rate hike decision while trying to soothe market sentiment.

However, the potential impact of a massive stimulus plan is causing caution among investment firms. RBC Asset Management Chief Investment Officer Mark Dowding warned that if policy credibility is damaged, it could trigger a broad sell-off of assets, and the firm is even preparing to deploy short positions on the short end of the curve. T&D Asset Management Chief Strategist Hiroshi Isonaga fears that a 25 trillion yen stimulus could trigger a "triple kill" of stocks, bonds, and currencies, reminiscent of the chaos caused by the UK Truss policy shock in 2022. Singapore macro strategist Alex Loo also believes that if the stimulus exceeds expectations, long-term Japanese government bond yields could rise further, and the yen may weaken against the dollar toward 160.

On the technical side, the USD/JPY daily chart shows overbought signals. The RSI indicator is high, suggesting a short-term acceleration in the exchange rate. If the rate stabilizes around 157.0, further rebound testing the 160 resistance level is possible. Investors should pay close attention to the time window around November 27, as it may be a key point for a trend reversal.