As the Japanese Yen rebounds past the 155 level, the pace of interest rate hikes is the real key!

The USD/JPY trend experienced a dramatic shift in December. Initially, due to the Bank of Japan’s cautious stance on interest rate hikes, it briefly broke through the 157.76 high, only to quickly retrace following warnings from government spokespersons. This reflects not only technical fluctuations in the exchange rate but also the tug-of-war between Japan’s monetary policy and market expectations.

Japanese Finance Minister Shunichi Suzuki and Deputy Minister Masamura Jun repeatedly issued comments, hinting that the government is closely monitoring excessive currency fluctuations. The market responded accordingly, gradually adjusting its short positions on the yen. But the key question is: can this rebound continue? Or is it just a fleeting moment?

Rate hike expectations are the real driver of the exchange rate

Analysis from Sanford Bank’s investment strategy indicates that the core issue lies in the time lag. The Bank of Japan’s rate hike cycle is extremely cautious, while the Federal Reserve may shift to a dovish policy in 2026—this policy divergence makes it difficult to resolve the long-term depreciation pressure on the yen. Against this backdrop, the exchange rate is more likely to fluctuate within a certain range rather than trend unilaterally.

Japan’s spring wage negotiations will become a focal point. If companies’ wage increases fall short of expectations, the central bank may further delay rate hikes, reigniting yen depreciation pressures. In contrast, exchange rate policies in other Asian economies like the Philippines vary, reminding investors to conduct more detailed regional comparative analysis.

When will the rate hike truly matter to the market

The market generally expects the Bank of Japan to continue raising rates in the second half of 2026. However, there are differing views on the timing—some analysts see June to July as the window for a second round of hikes, while others point to October. Although these timing differences seem minor, they can significantly impact the yen’s movement.

With a considerable amount of time until the next rate hike, the yen faces short-term depreciation pressures. Some strategists predict that in the first quarter of 2026, USD/JPY could challenge the 162 level. But such forecasts also imply a risk: if the US maintains high interest rates long-term and the Bank of Japan remains cautious, the yen’s weakness will be difficult to reverse.

When will government intervention be triggered?

Opinions are divided on whether the Christmas holiday will trigger government intervention. Low liquidity environments can indeed amplify intervention effects, but it also depends on whether the exchange rate breaks key psychological levels. If USD/JPY does not significantly break through 159, authorities may adopt a wait-and-see approach. This contrasts sharply with active interventions during the liquidity crisis of 2022.

Overall, the future direction of the yen depends on three variables: the pace of the Bank of Japan’s rate hikes, the long-term US interest rate trend, and shifts in market risk appetite. The short-term rebound is just the prologue; long-term range-bound fluctuations are the main theme. Investors should closely monitor economic data such as Japan’s spring wage negotiations and subsequent central bank policy signals.