Japan's interest rate hike is imminent. Can the Japanese Yen exchange rate break through the 155 level?

The Bank of Japan Governor Kazuo Ueda’s recent hawkish stance has sparked market speculation. He stated that he will review the pros and cons of a December rate hike and make a decision accordingly. This remark is widely interpreted as a signal of an upcoming rate increase. Overnight index swap data responded dramatically, with market expectations for a December rate hike in Japan surpassing 80%.

French Paris Bank economists directly stated that Ueda’s latest speech is almost an official preview of a December rate hike. Analysts from Barclays and JPMorgan Chase also revised their outlook, moving the rate hike window from January next year to December. Nevertheless, Goldman Sachs remains cautious, believing that the Bank of Japan may need to observe more corporate wage reports, and a rate increase in January remains the main expectation.

USD/JPY fell to 154.66 on December 1, hitting a low not seen in nearly two weeks. This decline is driven by the market’s rising expectation of a rate hike by the Bank of Japan. Meanwhile, the Federal Reserve is moving in the opposite direction—markets are betting on nearly a 90% chance of a rate cut in December, and the interest rate differential between the US and Japan is narrowing rapidly.

The narrowing interest rate differential has triggered a new wave of carry trade unwinding. Carry trading involves borrowing low-interest-rate yen to buy high-yield dollar assets. When the interest rate gap shrinks, traders close their positions to cut losses. Coin Bureau analyst Nic Puckrin pointed out that the rapid appreciation of the yen is once again stirring market dynamics, and the pressure to unwind carry trades is resurfacing.

Mitsubishi UFJ Financial Group analyst Lee Hardman predicts that as expectations for a rate hike in Japan continue to rise, the yen’s appreciation against the dollar is likely to persist. His view suggests that by early 2026, USD/JPY could further decline to the 150 level, indicating room for further yen appreciation.