December Bank of Japan Decision Imminent: Rate Hike Signal to Trigger Forex Market, Emerging Currencies Face Reshuffle

What is the market waiting for?

A major meeting is coming up on December 19th—the Bank of Japan’s interest rate decision announcement. While the market has already reached a consensus on the direction of rate hikes, the real focus is not on the hike itself, but on what signals Bank of Japan Governor Ueda Shinji will send regarding the “future rate hike roadmap.”

Currently, industry experts believe that the Bank of Japan will raise the benchmark interest rate to 0.75%, which would be the highest level in Japan in 30 years. Interestingly, this rate hike has already been fully priced in by the market—institutions’ true focus has shifted further into the future.

“Hawkish” or “Dovish,” the outcome could be very different

Predictions from Nomura Securities and Bank of America have diverged.

The former believes that market expectations for the Bank of Japan are somewhat overly optimistic (or overly “hawkish”). The latter points out that even if the Bank of Japan raises rates, if the stance remains sufficiently conservative (“dovish rate hike”), USD/JPY could continue to strengthen into early next year, even approaching 160.

However, if the Bank of Japan actually demonstrates an aggressive rate hike outlook (“hawkish rate hike”), then carry traders will start to unwind large positions—pushing USD/JPY back toward the 150 level. But the probability of this scenario is generally considered low.

Why would a rate hike in Japan shake the global markets?

This relates to carry trades. Simply put, investors borrow low-interest-yen and invest in higher-yield assets (such as US stocks, Bitcoin, or emerging market currencies like USD/PHP). When the Bank of Japan raises rates, borrowing costs for yen increase, forcing these leveraged trades to unwind.

Historical precedent is in sight: at the end of July 2024, the Bank of Japan unexpectedly raised rates to 0.25%, directly triggering a reverse carry trade wave, causing the yen to surge and US stocks and Bitcoin to plummet.

Will this meeting be the same?

Analysts’ answers are: unlikely to be so dramatic. Two main reasons support this judgment:

First, expectations for rate hikes have been widely discussed and priced in, leaving little room for “black swan” events;

Second, Japan is still implementing large-scale fiscal stimulus, which in itself artificially depresses the yen, contrary to the direction of rate hikes by the central bank.

What is the outlook for the exchange rate?

Nomura Securities has an ambitious mid-term target: by 2026, USD/JPY will gradually decline each quarter from 155 down to 140. The logic behind this is that yen depreciation is accumulating domestic political pressure, and rate hikes will help alleviate this pressure.

Bank of America’s forecast is more moderate: maintaining a range of 155-160 throughout 2026, implying that the dollar’s strength could persist longer.

For emerging market traders, the outcome of this “USD/JPY” battle will directly influence the entire emerging currency landscape—whether it’s USD/PHP or other Asian currencies, adjustments may follow.

What is the bottom line?

If the central bank adopts a “dovish” stance, the yen will continue to depreciate, and carry traders will comfortably borrow yen to chase higher yields. If the central bank suddenly turns “hawkish,” a wave of margin calls will instantly disrupt global risk assets. On December 19th, the game will soon be clear.