USD/JPY surges to 157.78! Bank of Japan's rate hike signals trigger three major market risks

The USD/JPY exchange rate has recently accelerated its rise, hitting a new high of 157.78 on Thursday since mid-January, just a hair away from the critical 158.0 level. Behind this surge lies a complex interplay of the Bank of Japan’s policy shift, government fiscal stimulus, and market expectations.

Clear signals of rate hikes, yen under downward pressure

Bank of Japan Policy Board member Junko Koide issued a hawkish signal on Thursday (November 20), hinting that the earliest possible rate hike could occur next month, making “normalization” of monetary policy a certainty. According to official information, the BOJ’s interest rate decision will be announced on December 19, with markets generally increasing the probability of a rate hike. However, timing remains a key issue—new Prime Minister Sanae Takaichi plans to announce an economic stimulus package this Friday, with a scale expected to reach 14 trillion yen, an increase from last year’s 13.9 trillion yen.

Investors worry that excessive stimulus could conflict with the BOJ’s tightening policies, and this policy discord is fueling volatility in the exchange rate. Japanese Finance Minister Shunichi Suzuki has repeatedly issued verbal warnings, emphasizing concern over rapid, unidirectional currency movements and calling for avoiding disorderly changes. Yet, market forces seem to be surpassing official rhetoric—on Thursday, the yield on Japan’s 10-year government bonds soared to 1.842%, prompting investors to accelerate selling off Japanese bonds and yen.

Contradictions exposed by economic data

On the surface, government spending expansion appears reasonable. Japan’s Q3 GDP, released Monday, contracted at an annualized rate of 1.8%, marking the first negative growth in six quarters, highlighting economic weakness. But deeper issues warrant attention—key inflation indicators in Japan 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.

What does this imply? Nominally, there is upward pressure on prices, but households’ real purchasing power is shrinking. The continued depreciation of the yen will further raise import prices, internalizing inflationary pressures domestically. From the BOJ’s perspective, launching easing policies now would be like pouring gasoline on the fire, making the case for rate hikes even stronger.

Institutional investors sound the alarm

Mark Dowding, Chief Investment Officer at RBC BlueBay Asset Management, bluntly stated that if Takashi’s policy credibility is damaged, it could trigger a large-scale sell-off of assets by investors. The firm has hinted at possibly increasing short positions on the short end of the yield curve to hedge against potential volatility in the Japanese bond market.

Hiroshi Tada, Chief Strategist at T&D Asset Management, expressed more direct concerns—regarding the scale of 25 trillion yen(, which appears to be a typo for 25 trillion yen), market skepticism about its necessity is high, and there are worries that its implementation could lead to a “triple kill” of stocks, bonds, and currency, similar to the market turmoil when Liz Truss took office in the UK in 2022. Alex Loo, a macro strategist at TDSecurities Singapore, shares a similar view: if Takashi launches a large-scale budget, long-term Japanese government bond yields are likely to rise, and USD/JPY could further depreciate toward 160.

Technical outlook points to 160.0 level

From the daily chart, the RSI indicator has entered overbought territory, indicating a clear acceleration in the upward momentum of the exchange rate. The short-term trend remains bullish; if USD/JPY can hold above 157.0 support, the subsequent rebound target is directly at 160.0. Caution is advised around the time window of late November 27, as historical experience suggests such critical points often herald a trend reversal.

In the coming week, the scale of Japan’s economic stimulus plan, BOJ’s stance on policy coordination, and the dollar’s overall trend will jointly determine the future direction of USD/JPY. 160.0 is not only a technical level but also a litmus test for Japan’s policy confidence.