Yen appreciation dream difficult to realize? December central bank decision becomes turning point

The Japanese yen exchange rate has been under continuous pressure recently, with USD/JPY approaching the 156 level at one point. However, government intervention rumors and expectations of the central bank raising interest rates are quietly changing market sentiment. The question is, can this reversal sustain in the long term?

The FOMC Decision as the Key to the Situation

The Bank of Japan (BOJ) is scheduled to announce its interest rate decision on December 19, while the Federal Reserve (Fed) will disclose its policy outlook one week earlier. This time gap may seem insignificant, but it contains hidden implications—analysts generally believe that the BOJ’s decision to raise rates will be directly influenced by the Fed’s actions.

If the Fed chooses to hold steady, the pressure on the BOJ to raise rates will increase significantly; conversely, if the Fed initiates rate cuts, the BOJ is likely to delay its move. Currently, market expectations for the BOJ to raise rates in December and January are evenly split at 50%, with markets still awaiting signals from the Fed.

Australian Commonwealth Bank analyst Carol Kong pointed out, “The cautious BOJ may wait until the parliament passes the budget before raising rates, which also gives the central bank time to observe wage negotiations.”

Is One Rate Hike Enough? The Yen’s Rebound Faces Tests

Even if the BOJ raises rates as scheduled in December, it does not mean the story of yen appreciation will unfold immediately. UBS foreign exchange strategist Vassili Serebriakov raised a core concern: “A single rate hike is unlikely to significantly reverse the yen’s trend unless the central bank adopts a hawkish stance and commits to continued hikes through 2026 to combat inflation.”

The core issue lies in the fact that the US-Japan interest rate differential remains relatively high. Although rate hike expectations are pushing the yen higher, carry trade arbitrage mechanisms still exist, and funds continue to utilize the interest rate gap for hedging operations. As long as the interest differential remains wide, the motivation to short the yen will not fully dissipate.

Jane Foley, Head of Foreign Exchange Strategy at Rabobank, analyzed from an intervention perspective: “Market concerns about government intervention alone are enough to suppress the dollar’s rally, but if these expectations are overly priced in, it could reduce the actual need for authorities to intervene.”

When Will the Yen Truly Appreciate? Stay Tuned

Since Prime Minister Fumio Kishida stated on November 26 that the government would closely monitor exchange rate fluctuations and take necessary actions at any time, USD/JPY has begun to retrace from its high point, and as of the 27th, it has fallen below 156. This indicates that intervention expectations are indeed having an effect.

However, the fundamental difficulties facing the yen have not disappeared. The interest rate differential persists, carry trades continue, and Fed policies remain uncertain—these factors all constrain the space for yen appreciation. The December rate hike by the BOJ may be a watershed moment, but whether it can truly reverse the yen’s downward trend still depends on the strength of the central bank’s policy tone and whether the Fed can continue to ease as the market expects.

In this policy game between the BOJ and the Fed, the path to yen appreciation remains full of variables.