The Bank of Japan's December rate hike probability soars to 80%. Has the yen's appreciation cycle really begun?

The recent hawkish stance by Bank of Japan Governor Kazuo Ueda has triggered market turbulence. Overnight index swap data shows that the market has priced in an over 80% probability of a rate hike by the Bank of Japan in December, creating the strongest policy signal in history. Meanwhile, the USD/JPY exchange rate has fallen from 154.66 on December 1 to a key support level, indicating that carry trade positions are accelerating to close.

Several Investment Banks Have Preemptively Predicted the Central Bank’s Direction

Regarding whether the Bank of Japan will raise interest rates in December, opinions among investment institutions are divided. Economists at Société Générale believe Ueda’s statements are close to a “confirmation letter,” while Barclays and JPMorgan Chase have simply moved the rate hike from January to December. However, Goldman Sachs has taken a more cautious stance, believing that the central bank may need to observe more corporate wage data before making a final decision.

This divergence reflects the true market picture—although expectations for a rate hike are high, the final decision still rests with the Bank of Japan.

Narrowing US-Japan Interest Rate Differential, Can the Yen’s Appreciation Continue?

More attention should be paid to the Fed’s stance. Market bets on a rate cut by the Federal Reserve in December have risen to nearly 90%, which means the interest rate differential between the US and Japan will further narrow.

When the interest rate gap shrinks, carry trades involving borrowing in yen and investing in dollar-denominated bonds lose their appeal. Coin Bureau analysts say that a large number of closing orders are flooding into the market, and the yen’s appreciation cycle seems to have begun. Lee Hardman of Mitsubishi UFJ Financial Group predicts that as the market’s expectation for a BOJ rate hike continues to heat up, USD/JPY could fall to the psychological level of 150 in early 2026.

How Will Yen Appreciation Affect the RMB/JPY Exchange Rate?

The chain reaction of yen appreciation is worth noting. When the yen appreciates relative to other currencies, the RMB/JPY exchange rate will also adjust accordingly. From the perspective of cross-border trading and investment, yen appreciation usually leads to the relative depreciation of other East Asian currencies, which directly impacts importers and cross-border investors.

In the long term, if the Bank of Japan maintains its rate hike path, the yen’s upward momentum could continue until 2026, altering the relative value of East Asian currencies as a whole.

The market is at a critical turning point. The Bank of Japan is about to send clear signals, and the Federal Reserve is also preparing for a new round of actions. The collision of these forces will reshape the short-term trends of the yen, dollar, and even the RMB/JPY exchange rate. Investors need to closely monitor the pace of central bank meetings and adjust their positions in advance.