The Bank of Japan is about to raise interest rates, with a probability exceeding 80% in December! Can the yen's appreciation trend continue?

The Bank of Japan Governor Kazuo Ueda recently signaled a clear hawkish stance, indicating that he will seriously assess the feasibility of a rate hike in December. Following this statement, the market reacted swiftly—overnight index swap data shows that investor bets on a December rate hike have already exceeded 80%, reaching a new high.

Analysts from Barclays and JPMorgan immediately adjusted their expectations, moving the originally scheduled rate hike from January next year to December. Economists at BNP Paribas went further, stating that Ueda’s latest remarks almost serve as a “pre-announcement” for a December rate increase. However, Goldman Sachs remains cautious, believing that the central bank may need to wait for more corporate wage data as a reference, so the possibility of delaying the hike until January 2025 cannot be ruled out.

Narrowing US-Japan Interest Rate Differential Triggers Large-Scale Unwinding of Carry Trades

Contrasting with the hawkish stance of the Bank of Japan, market expectations for a Fed rate cut in December are similarly high, with betting probabilities approaching 90%. This divergence in expectations is accelerating a wave of “carry trade” unwinding.

The core logic of carry trades is borrowing low-interest-rate currencies (Japanese Yen) to buy high-interest-rate assets (USD) to earn the interest spread. When the US-Japan interest rate differential narrows, the profit margin of this strategy diminishes, forcing traders to unwind their positions, which in turn pushes up the value of the Yen. Coin Bureau analyst Nic Puckrin pointed out that Yen exchange rate fluctuations are disrupting market rhythm again, and the wave of Yen carry trade unwinding has resumed.

Yen Strength Likely to Continue, Exchange Rate Targeting 150

USD/JPY fell to 154.66 on December 1, hitting a near two-week low, reflecting a Yen appreciation trend. As expectations for a Japanese rate hike intensify, this upward trend may continue.

Mitsubishi UFJ Financial Group analyst Lee Hardman predicts that by early 2026, USD/JPY could further decline to the 150 level. This indicates that Yen appreciation potential still exists in the future, and investors should closely monitor the latest developments in central bank decisions.

The market currently has a consensus expectation: the Bank of Japan’s rate hike is an inevitable trend, and Yen appreciation will continue driven by the narrowing US-Japan interest rate differential and carry trade unwinding. For investors concerned with exchange rate volatility, this wave of changes is undoubtedly worth close attention.