Bank of Japan's December decision imminent: Hawkish rate hike or dovish rate hike? Institutional opinions are clearly divided

Market Pricing Is Clear, Focus Shifts to Policy Outlook

The Bank of Japan will announce this month’s interest rate decision on December 19. The market consensus is a 25 basis point hike to 0.75%, which would mark a 30-year high. However, since this rate hike has already been fully priced in by the market, traders are turning their attention to a longer-term question—how Governor Ueda and his team will describe the future pace of rate hikes.

Institutions have divergent expectations for the next policy path. Most believe the Bank of Japan will raise the lower bound of the neutral rate estimate (from the current 1.0%) upward, with current market pricing indicating that rates could reach 1.0% by September 2026. However, Nomura Securities has expressed dissent, suggesting that market expectations may be overly hawkish.

The “Double-Edged Sword” of Carry Trades

The chain reaction triggered by Japan’s rate hike extends far beyond its borders. A large volume of arbitrage trading based on USD/JPY—borrowing low-interest yen to buy high-yield assets (such as US stocks, Bitcoin, etc.)—may come to an abrupt halt when the BOJ raises rates. Closing these positions would trigger yen appreciation, putting pressure on high-risk assets like US stocks and Bitcoin.

The scene as of late July 2024 remains vivid: after the BOJ unexpectedly raised rates by 25 basis points to 0.25%, the yen surged, and US stocks and Bitcoin fell sharply. However, analysts note that the impact this time should be relatively moderate. On one hand, the rate hike was widely anticipated, and markets have already prepared accordingly; on the other hand, Japan is still implementing large-scale fiscal stimulus measures, which will likely limit the yen’s appreciation.

Divergence Among Institutions on USD/JPY Outlook

Bank of America’s view leans toward a “dovish hawk” stance. The bank believes that if the BOJ adopts a “dovish” rate hike posture (implying a slow pace of future hikes), USD/JPY could remain high, potentially approaching 160 by 2026. Conversely, if the BOJ shifts to a “hawkish” stance, short covering of yen shorts could push USD/JPY back down to around 150—though Bank of America considers this scenario less likely. Their full-year forecast for 2026 is: Q1 at 160, Q2 at 158, Q3 at 156, Q4 at 155.

In contrast, Nomura Securities is more optimistic about yen appreciation. The firm points out that yen depreciation is increasing domestic political pressure, and the BOJ may face a more hawkish stance. Additionally, as the US-Japan interest rate differential narrows, the attractiveness of yen arbitrage trades will diminish. Nomura’s target for USD/JPY in 2026 is more pessimistic—Q1 at 155, Q2 at 150, Q3 at 145, Q4 at 140.

Linkage Effects in Emerging Asian Markets

The BOJ’s policy shift will also impact other Asian currencies. For example, when the yen strengthens and carry trades reduce, capital flows to Southeast Asian emerging markets may adjust accordingly, affecting currencies like the Philippine peso. This reminds investors that a single central bank’s decision often propagates through exchange rates and capital flows across the region.

Summary

The December 19 BOJ decision will be a key moment to test market consensus. Whether the BOJ adopts a hawkish or dovish stance, the long-term trend of USD/JPY could fluctuate through 2026. The divergence among institutions essentially reflects differing judgments on the durability of Japan’s policy and the resilience of global carry trades. Investors should closely monitor Ueda’s statements on the neutral rate, as this will be a critical signal for the subsequent market direction.