The Japanese Yen breaks through the 155 level against the US dollar. The Bank of Japan's December rate hike probability exceeds 80%. What signals does this send?

A recent phenomenon in the foreign exchange market has attracted widespread attention: USD/JPY fell to 154.66 in early December, hitting a two-week low. What is behind this? It mainly stems from a shift in the Bank of Japan's stance on policy adjustments.

**Central Bank signals a hawkish stance, market reacts strongly**

Bank of Japan Governor Kazuo Ueda recently stated that they will carefully weigh the pros and cons of a December rate hike and make decisions based on actual conditions. These remarks are interpreted by the market as the strongest policy signal so far. Overnight index swap data shows that traders' expectations for a December rate hike by the BOJ have risen to over 80%.

The market responded quickly. Economists at BNP Paribas believe Ueda's statement almost confirms a December move. Barclays and JPMorgan Chase have also shifted their expectations for the BOJ's policy adjustment from January next year to this month. However, Goldman Sachs remains cautious, thinking the central bank may still be waiting for more corporate wage data, and the likelihood of action in January next year is higher.

**Carry trade unwinding creates new variables for USD/JPY**

Contrasting the hawkish stance of the BOJ, market bets on a Fed rate cut in December are approaching 90%. The narrowing interest rate differential between the US and Japan is triggering a key phenomenon: the unwinding of carry trades.

Carry trade involves investors borrowing low-interest currencies (Yen) to buy high-yield assets. When the interest rate differential narrows, such trades become unprofitable, prompting investors to close positions, which often pushes the Yen higher. Coin Bureau analyst Nic Puckrin notes that Yen appreciation is once again impacting market dynamics, and a new round of unwinding is underway.

**Yen appreciation trend may continue**

In the long term, Lee Hardman, an analyst at Mitsubishi UFJ Financial Group, believes that as expectations for BOJ rate hikes continue to rise, the Yen against the US dollar(USD/JPY) may continue its upward momentum. He forecasts that by early 2026, USD/JPY could further decline toward the 150 level.

What does this mean? Simply put, the Yen is appreciating against the dollar, which will affect import-export trade, cross-border investments, and forex traders' decisions. Investors holding USD assets should closely monitor this trend.