Is the Yen's depreciation unstoppable? The 21 trillion Yen stimulus package sparks the market, but a genuine rebound requires the central bank to take real action.

The forex market in November once again stirred up waves. USD/JPY broke through the 157.89 level, hitting a nearly 10-month high, while the Japanese government approved a 21.3 trillion yen economic stimulus package on November 21, which is considered a major driver behind the currency fluctuations.

This record-breaking additional spending plan post-pandemic allocates the majority of funds to price relief measures, totaling 11.7 trillion yen. The funding comes from tax revenue increases driven by inflation and new government bond issuance. The market generally worries that large-scale fiscal spending could further weaken Japan’s monetary policy effectiveness and intensify the yen’s depreciation pressure.

Government bond yields soar, exchange rates under pressure

Following the stimulus announcement, market reactions were swift. On November 20, the 10-year Japanese government bond yield jumped to 1.842%, the highest level since 2008. Such rising yields are often accompanied by expectations of currency depreciation, as investors demand higher returns to compensate for declining purchasing power.

The rapid weakening of the yen against the dollar has triggered a significant chain reaction. Import costs rise, forcing companies to increase prices, and wage negotiations heat up accordingly. This inflation spiral has finally caught the attention of the Bank of Japan.

Central bank signals rate hike

BOJ Governor Kazuo Ueda recently stated that the ongoing yen weakness will push up import prices, further intensifying inflationary pressures. He emphasized that the impact of exchange rate fluctuations on prices is far greater than before, and the central bank must remain vigilant. These remarks are interpreted by the market as a prelude to a rate hike in December.

If the BOJ indeed begins raising interest rates in December, narrowing interest rate differentials could support the yen. However, ANZ Bank forex strategist Rodrigo Catril pointed out that relying solely on central bank intervention is unlikely to reverse the depreciation trend. Historical experience shows that unless fiscal discipline and monetary policy work in tandem, intervention actions will only serve as opportunities to short the yen.

Breaking 160—just one document away?

Market focus is on the psychological barrier of 160. Japanese authorities have intervened multiple times in this range last year. However, if the BOJ chooses to delay the rate hike plan, breaking through 160 in USD/JPY is only a matter of time. Conversely, if the central bank aligns with rate hike expectations, a rebound of the yen below 150 is also possible.

The current focus is on the December BOJ decision. The policy choice will determine the future direction of the yen: whether it continues to depreciate to new lows or rebounds under the central bank’s actions.