Japanese Yen exchange rate surges to 158! Will the central bank take action to raise interest rates in December?

The US dollar continues to strengthen against the Japanese yen, with the exchange rate recently entering a new rally phase. On November 20, USD/JPY surged to 157.89, hitting a nearly 10-month high, with market focus increasingly centered on the psychological barrier of 160.

Government’s 21.3 Trillion Yen Stimulus Plan Sparks Chain Reactions

In response to the economic downturn, the Japanese government officially approved a massive economic stimulus package on November 21, totaling 21.3 trillion yen, setting a new record since the pandemic. The core focus of the plan is on price relief, with 11.7 trillion yen allocated specifically to ease inflationary pressures, while the remaining funds are directed toward investments in key industries.

This substantial expenditure will be financed through two main channels: first, expected tax revenue increases driven by post-pandemic inflation; second, new government bond issuance. The Cabinet is expected to approve the supplementary budget no later than November 28, aiming for parliamentary approval before the end of the year.

Driven by these expectations, the yield on 10-year Japanese government bonds rose to 1.842%, the highest level since 2008. The massive fiscal spending combined with bond issuance pressures pushed up long-term interest rates, further intensifying the depreciation pressure on the Japanese yen.

Yen Depreciation and Inflation’s Vicious Cycle Emerge

Bank of Japan Governor Kazuo Ueda issued a warning about the current situation: a continued weakening of the yen could trigger further inflation deterioration. The decline in exchange rates raises the cost of imported goods, prompting companies to raise wages and product prices, creating a risk of cost-push inflation.

Ueda emphasized that exchange rate fluctuations now have a more pronounced impact on the price transmission system than in the past, requiring the central bank to remain highly vigilant. This statement hints at a leaning within the decision-making circle toward supporting a rate hike in December, attempting to curb the yen’s depreciation by raising policy interest rates.

The 160 Barrier: Intervention vs. Rate Hike

ANZ Forex Strategist Rodrigo Catril pointed out that 160 has become a focal point for all parties, with Japanese authorities having intervened multiple times within this range. However, historical experience shows that mere intervention, without accompanying fiscal or monetary discipline, often becomes an opportunity for short-sellers to profit.

Catril’s assessment is clear: if the Bank of Japan decides to raise interest rates, USD/JPY could retreat below 150; if not, breaking through 160 becomes highly probable. This means that the central bank’s decision will directly determine the future trajectory of the yen exchange rate.

The market is currently awaiting signals from the December BOJ meeting, with policy options swinging between rate hikes and wait-and-see approaches, and each decision will profoundly influence the future path of the Japanese yen.