Will Federal Reserve decisions or Japan's interest rate hikes ultimately ease the pressure on the yen's depreciation?

The Japanese Yen has recently continued to weaken against the US dollar, with market focus centered on two key central bank meetings in December. The policy directions of the Bank of Japan and the Federal Reserve are deeply influencing the future trajectory of the Yen, and whether the Japanese currency can reverse its depreciation trend likely depends on US interest rate policies.

Fed Rate Cut Expectations Rise, Bank of Japan Faces Rate Hike Pressure

The USD/JPY exchange rate has experienced a correction amid calls for government intervention, recently falling below the 156 level. Behind this is market anticipation that Japanese authorities may strengthen foreign exchange regulation. In late November, the Japanese Prime Minister expressed high concern over exchange rate fluctuations, signaling that the government may intervene at any time.

At the same time, news about the Bank of Japan possibly starting to raise interest rates as early as December has been frequently reported. As hawkish sentiments grow, this expectation is boosting Yen buying. However, market assessments of the probability of the Bank of Japan raising rates in December and January are roughly balanced, each around 50%.

Fed Decision Becomes a Key Variable

A crucial factor in whether the Bank of Japan will raise rates is the Federal Reserve’s actions. The Bank of Japan will announce its rate decision on December 19, while the Fed’s decision is expected about a week earlier.

This time gap means that the Fed’s policy signals will directly influence the Bank of Japan’s judgment. If the Fed maintains interest rates, pressure on the Bank of Japan to hike will significantly increase; conversely, if the Fed opts to cut rates, the Bank of Japan is more likely to hold steady.

ANZ Bank analysts noted that considering Japan’s parliamentary budget approval process, the Bank of Japan may prefer to wait until the parliament approves the budget before acting. Doing so not only aligns with procedural requirements but also gives the central bank more time to observe wage negotiations and assess inflation trends.

Can the Yen’s Depreciation Trend Be Reversed? Market Divided

Market analysts hold differing views on the future direction of the Yen.

On one hand, rising expectations of rate hikes combined with the possibility of Fed rate cuts are driving the US-Japan interest rate differential to narrow further, increasing the likelihood of a correction in USD/JPY from recent highs.

On the other hand, the interest rate gap between Japan and the US remains significant, and arbitrage trading continues, meaning the fundamental momentum for Yen depreciation has not disappeared.

UBS forex strategist believes that a single rate hike alone is unlikely to significantly change the Yen’s trend. Unless the Bank of Japan adopts a more aggressive policy stance and commits to continued rate hikes through 2026 to combat inflation, the Yen will find it difficult to escape depreciation. Moreover, current volatility remains low, which also limits the possibility of rapid price reversals.

Can Government Intervention Change the Game?

The willingness of authorities to intervene has been expressed, but its actual effectiveness remains uncertain. A head of FX strategy at ABN AMRO Bank pointed out an interesting paradox: if market fears of intervention become strong enough to curb the USD/JPY rally, it may actually reduce the necessity for authorities to take action.

This suggests that solving the Yen’s depreciation problem ultimately depends on fundamental policy adjustments—namely, the persistence and magnitude of rate hikes—rather than short-term market interventions.