The Bank of Japan's December decision is approaching; the yen's trend awaits clarification.

The policy divergence between the Bank of Japan and the Federal Reserve is becoming the core driver of the yen exchange rate. As the December decision date approaches, market opinions on the yen’s outlook are divided.

Central Bank Decision Schedule Moves the Market

December 19th is a key date—the Bank of Japan will announce its latest interest rate decision, while the Federal Reserve’s decision will be released a week earlier. Analysts point out that the BOJ’s rate hike decision will be directly influenced by the Fed’s policy stance.

If the Fed maintains its current interest rate level, it will exert upward pressure on the BOJ; conversely, if the Fed cuts rates, the BOJ is more likely to hold steady. Currently, market expectations for rate hikes in December and January are almost evenly split, each with about a 50% probability.

Australian Commonwealth Bank analyst Carol Kong believes: “The cautious BOJ may wait until the parliamentary budget passes before taking action, which allows more time to observe wage negotiations and leaves room for future decisions.”

Narrowing Interest Differentials and Rate Hike Expectations

The fundamental reason behind the USD/JPY retreat from the high of 156 is the continued narrowing of the US-Japan interest rate differential. As expectations for a BOJ rate hike strengthen and Fed rate cut expectations rise, this narrowing trend becomes more apparent, increasing the likelihood of exchange rate adjustments at high levels.

However, narrowing interest differentials do not guarantee yen appreciation. UBS FX strategist Vassili Serebriakov emphasizes: “A single rate hike alone cannot fundamentally change the yen’s trend. Unless the BOJ adopts a firm rate hike path and commits to continued hikes through 2026 to control inflation, the impact will be limited.” He adds that the US-Japan interest rate differential remains relatively high, and market volatility is low, so arbitrage trading still has momentum.

Uncertainty of Exchange Rate Reversal

Dutch bank ING’s FX strategist Jane Foley offers another perspective: “Intervention expectations themselves become market forces. If concerns about government intervention are enough to suppress the dollar’s rally, the need for actual intervention diminishes.” This reflects the current delicate balance in the market.

The yen’s appreciation trend is not solid. Although there has been a recent technical correction, the interest differential between Japan and the US remains attractive, and the existence of arbitrage trades means downward pressure has never truly dissipated. The future of the yen depends on the actual progress of central bank policies, not just expectations.