The Bank of Japan's December rate hike probability approaches 80%. Can the yen's rally continue?

The Japanese Yen exchange rate has recently experienced a turning point. USD/JPY fell to 154.66 on December 1, hitting a two-week low, as the underlying drivers are quietly changing.

The hawkish stance of the central bank triggers market re-pricing

Bank of Japan Governor Kazuo Ueda’s latest remarks have caused a stir in the market. He publicly stated that he will weigh the pros and cons of a December rate hike and make a decision accordingly. This wording is widely interpreted as the strongest hawkish signal. Subsequently, overnight index swap data shows that the probability of a BOJ rate hike in December has risen to over 80%, completely changing previous market expectations of a January hike.

Economists at BNP Paribas in Paris directly said that Ueda’s speech is a “prelude” to a December rate hike. Barclays and JPMorgan Chase have also adjusted their positions, moving the rate hike timetable from January next year to this month. However, Goldman Sachs remains cautious, believing that policymakers may still need to wait for corporate wage data to be released, and the likelihood of action in January remains high.

Narrowing US-Japan interest rate differential triggers carry trade risks

At the same time, the Federal Reserve’s policy direction is exerting another influence on the yen. Market bets on a Fed rate cut in December have risen to nearly 90%, indicating that the interest rate gap between the US and Japan is narrowing rapidly.

The consequences of the narrowing interest rate differential should not be underestimated. The once-hot “yen carry trade” (borrowing yen to buy dollar assets to earn the interest rate spread) is facing liquidation pressure. Coin Bureau analyst Nic Puckrin pointed out that the rise in the yen exchange rate is once again disturbing the market, and yen arbitrage trading is restarting its exit mode.

Yen appreciation trend and its correlation with the HKD

As expectations for BOJ rate hikes heat up, emerging market currencies such as the HKD against the yen will also be affected. Lee Hardman, an analyst at Mitsubishi UFJ Financial Group, predicts that the yen’s appreciation trend is likely to continue. His model shows that by early 2026, USD/JPY could decline to the 150 level.

This adjustment reflects a reconstruction of the global capital pricing mechanism—the policy shift of the Bank of Japan is reshaping the yen’s position in the global currency system, and the performance of the yen against the HKD will also be an important reference indicator in this wave.