The Bank of Japan's December rate hike probability approaches 80%, and the yen's appreciation chain is starting to activate

Market Pricing Has Begun to Take Shape

On December 1st, local time, USD/JPY fell to 154.66, hitting a two-week low. This is not an isolated phenomenon but a collective market response to the Bank of Japan’s policy shift. The latest data from the overnight index swap market shows that expectations for a December rate hike have exceeded 80%, far above the previous market consensus.

The Bank of Japan’s Hawkish Signals Are Becoming More Clear

The key driver of this shift is the recent statement by Bank of Japan Governor Kazuo Ueda. He said that he will carefully weigh the pros and cons of a rate hike at the December meeting, which the market interprets as the strongest policy shift signal. Economists at BNP Paribas in Paris directly stated, “This is almost an official preview of a December rate hike.”

Institutional positions are also rapidly adjusting. Barclays and JPMorgan have moved the timing of the rate hike from January next year to this month. However, Goldman Sachs remains cautious, believing that policymakers may still need more corporate wage data to support a decision, and action in January remains possible.

Narrowing US-Japan Interest Rate Differential, Carry Trade Is Reversing

Interestingly, in contrast to the hawkish stance of the Bank of Japan, market bets on a Fed rate cut in December have risen to nearly 90%. The narrowing of the US-Japan interest rate differential is tearing apart the original carry trade structure.

Coin Bureau analyst Nic Puckrin pointed out that fluctuations in the yen are triggering chain reactions—“Yen arbitrage trading is beginning to unwind on a large scale.” This means that investors who previously borrowed yen to buy dollar assets are now reversing their positions.

Lee Hardman, an analyst at Mitsubishi UFJ Financial Group, believes that as expectations for a Japanese rate hike heat up, the yen will enter a new appreciation cycle. The institution predicts that by early 2026, USD/JPY could fall toward the 150 level.

How Will Yen Appreciation Affect Other Assets?

It is worth noting that yen appreciation often triggers chain reactions across the entire Asian currency system. The USD/JPY exchange rate may also face adjustment pressures during this process. The larger the scale of carry trade unwinding, the more significant the impact on related currency pairs such as RMB/JPY. Investors should closely monitor the movements of RMB/JPY and the resulting regional capital flow changes.