Federal Reserve movements become the key! Can the Bank of Japan's rate hike in December reverse the yen's depreciation?

The Japanese Yen has recently fallen into a complex situation under the influence of multiple factors. Calls for government intervention and expectations of the central bank raising interest rates have added to the uncertainty of USD/JPY movements. As of November 27, the exchange rate has retreated from recent highs, briefly falling below the 156 level, and market expectations for a reversal of the Yen’s depreciation are gradually increasing.

Policy signals heat up, intervention expectations overshadow the market

Japanese Prime Minister Fumio Kishida publicly stated on November 26 that the government will closely monitor exchange rate fluctuations and is prepared to take “necessary” actions in the foreign exchange market at any time. This move immediately drew high market attention, with multiple media reports indicating that the Bank of Japan is preparing for a possible rate hike in December. As hawkish voices increase, investors are adjusting their positions, and USD/JPY is showing a retreat from high levels.

Federal Reserve decisions will dominate the Bank of Japan’s actions

The Bank of Japan will announce its latest interest rate decision on December 19, while the Federal Reserve’s rate decision is expected to be announced the week prior. Analysts point out that this timing is crucial—the BOJ’s rate hike decision will be directly constrained by the Fed’s policy.

If the Fed chooses to keep interest rates unchanged, it will further pressure the BOJ to accelerate its rate hike pace; conversely, if the Fed cuts rates, the BOJ will be more inclined to hold steady. Recent market surveys show that the probability of the BOJ raising rates in December and January is about 50% each, and market expectations remain highly uncertain.

ANZ Bank analyst Carol Kong believes, “A cautious BOJ may wait until the parliament passes the budget bill before taking action. Delaying the rate hike decision can also buy the central bank more time to observe the development of the next round of wage negotiations.”

Is the Yen’s depreciation trend truly reversing?

The rising expectations of rate hikes and the increased likelihood of Fed rate cuts are driving the narrowing of the US-Japan interest rate differential. This change indeed increases the probability of USD/JPY pulling back from recent highs. However, the long-term downward pressure on the Yen has not completely dissipated—there remains a significant interest rate gap between the US and Japan, and arbitrage trading activities continue.

Vassili Serebriakov, FX strategist at UBS, emphasizes, “A single rate hike alone is unlikely to fundamentally change the Yen’s trend. Unless the BOJ adopts a clear hawkish rate hike path and commits to continuing policy normalization into 2026 to address inflation pressures, the impact will be limited. The US-Japan interest rate differential remains wide, and market volatility is low.”

Jane Foley, Head of FX Strategy at Rabobank, also warns, “Expectations of government intervention may themselves weaken the dollar’s rally, reducing the need for actual action by authorities. There is a possibility of policy intervention during Thanksgiving, but this kind of expectation management can itself generate market effects.”

Investment insights amid multiple uncertainties

The current market is seeking a balance among three major uncertainties—the direction of Fed policy, the timing of BOJ rate hikes, and the probability of government foreign exchange intervention. Whether the Yen’s depreciation trend truly reverses still requires close observation of December’s central bank decisions and relevant economic data. In the short term, the tug-of-war between Yen appreciation and depreciation will continue.