Will the Japanese Yen continue to fall? The expectation of the central bank raising interest rates marks a turning point

The Truth Behind the Yen’s Rebound

Last week, the market experienced a clear shift, and the yen began to strengthen. The USD/JPY declined by 0.16% over the week. Although this downward movement was modest, it reflects a profound change in market expectations. There are two main factors driving the yen’s rise: first, the Fed’s easing expectations are heating up; second, the Bank of Japan’s rate hike expectations are strengthening.

According to swap market data, the probability of the Bank of Japan raising interest rates on December 19 has increased to 62%, up sharply from 30% two weeks ago. The most direct catalyst for this change was Bank of Japan Governor Ueda Kazuo’s remarks on December 1 — he explicitly stated that he would consider the pros and cons of a December rate hike and make an appropriate decision, signaling the strongest hawkish stance to date.

US Dollar Under Pressure, Yen Gains Momentum

Meanwhile, the US dollar faces multiple pressures. The US labor market is weakening, and core PPI growth has fallen short of expectations. Fed officials like Waller and Williams have adopted dovish tones. Market expectations for a rate cut by the Fed in December have risen to 87.6%, with only a 12.4% chance of no cut — according to the latest data from CME FedWatch.

The overall performance of the currency markets confirms this trend. The US dollar index fell by 0.72%, while non-USD currencies generally appreciated. The euro rose by 0.71%, the Australian dollar by 1.48%, the British pound by 1.03%, and although the yen’s increase was the smallest (0.16%), the direction was clear.

Japanese Government Monitoring Closely, Rate Hike Expectations Strengthen

Japanese Prime Minister Sanae Sato’s remarks are also noteworthy. She stated that the government will closely monitor exchange rate fluctuations and is prepared to take “necessary” actions in the foreign exchange market at any time. This signals the Japanese authorities’ focus on the exchange rate and suggests that the pace of rate hikes may accelerate.

Nomura Securities pointed out that with the Fed’s rate cut expectations rising and the BOJ’s rate hike expectations strengthening, the volatility pattern of USD/JPY is likely to be broken, and the yen’s trend could undergo a significant turning point.

Technical Outlook Indicates Downside Potential

From a technical perspective, USD/JPY is approaching the 21-day moving average. If it breaks below this line, a larger downward space could open, with support levels around 154 and 153. However, if USD/JPY holds above the 21-day moving average, a consolidation trend is likely to continue in the short term.

Key Focus for the Market

This week, the market should pay close attention to statements from Japanese officials, media hints, and US economic data. If expectations for a BOJ rate hike further strengthen, USD/JPY could decline further. Conversely, if rate hike expectations diminish or US data improves, the yen’s rebound may be hindered.

Overall, will the yen continue to fall? The answer depends on whether rate hike expectations can be further solidified. If a December rate hike materializes, the yen is likely to continue appreciating. However, market uncertainties remain, and investors should closely follow subsequent developments.