The Bank of Japan is on the verge of raising interest rates, and the yen appreciation cycle has begun

The recent remarks by Bank of Japan Governor Kazuo Ueda have thoroughly changed market expectations. He explicitly stated that he would weigh the pros and cons of a rate hike in December and make a decision accordingly, a statement interpreted by the market as the strongest policy signal. Overnight index swap data shows that the probability of a rate hike in December by the Bank of Japan has surged to over 80%, far exceeding previous expectations.

Unprecedented Policy Signal Strength, Analysts Disagree on Timing of Rate Hike

Economists at BNP Paribas in Paris directly stated that Ueda’s speech is a prelude to a December rate hike. Barclays and JPMorgan Chase have even proactively moved their planned rate hike from January next year to December.

However, Goldman Sachs adopts a cautious stance, believing that the Bank of Japan may still be waiting for more corporate wage data to be released. The institution judges that the possibility of delaying the rate hike until January next year remains high.

Narrowing US-Japan Yield Spread, Carry Trade Positions Moving to Close

Compared to the hawkish stance of the Bank of Japan, the Federal Reserve is moving in the opposite direction. Market bets on a Fed rate cut in December have reached nearly 90%, indicating that the interest rate differential between the US and Japan is rapidly narrowing.

The shrinking spread directly threatens large carry trade positions. The classic strategy of borrowing yen to buy dollars is facing a new wave of closing pressure. Coin Bureau analyst Nic Puckrin pointed out that the rapid appreciation of the yen has already begun to shake the market, and the wave of closing arbitrage trades is restarting.

Yen Appreciation Expectations Clear, Exchange Rate to Further Adjust

On December 1, USD/JPY fell to 154.66, hitting a two-week low. As rate hike expectations continue to ferment and carry trades are unwound, the yen’s appreciation trend has gradually solidified.

Lee Hardman, an analyst at Mitsubishi UFJ Financial Group, believes that the rising expectation of a rate hike by the Bank of Japan will continue to strengthen the yen. The analyst predicts that by early 2026, USD/JPY will further fall toward the 150 level. This means that the yen’s appreciation cycle has just begun, with further adjustments still possible.

The market is re-pricing expectations for the Bank of Japan’s policy and yen appreciation, and investors need to closely monitor the latest developments in relevant data and central bank statements.