Did the Japanese Yen exchange rate reverse after hitting the historical low? The December central bank decision is the key!

The recent fluctuations of the Japanese Yen have been quite intense. The USD/JPY briefly fell below 156 after government statements, but this may only be a temporary respite. The real drama is still ahead—the December Bank of Japan interest rate decision will be a turning point.

How long can the “jawboning” by the central bank last?

On November 26, Japanese Prime Minister Fumio Kishida said he would closely monitor the exchange rate and intervene if necessary. This statement indeed startled the market, causing the USD/JPY to drop. But the question is, how long can verbal warnings be effective? Sources reveal that the BOJ might raise interest rates in December, and this expectation is currently evenly split in the market.

ANZ Bank analyst Carol Kong believes that the cautious BOJ might prefer to wait until the parliament passes the budget before acting, also to observe the progress of wage negotiations. In other words, rate hikes could be delayed.

The Federal Reserve is the key variable

Here’s a crucial point: One week before the BOJ announces a rate hike in December, the Fed will be holding a meeting. The Fed’s decision will directly influence the BOJ’s choices—

• If the Fed holds steady → pressure on the BOJ to raise rates increases
• If the Fed starts cutting rates → the BOJ is likely to stay on hold

Currently, the market expects roughly a 50/50 chance of the BOJ raising rates in December and January, and the market remains in a wait-and-see mode.

Will the Yen really appreciate? Don’t be too optimistic

This is what traders are most concerned about. The Yen has rebounded somewhat from its historic lows, but Vassili Serebriakov, UBS FX strategist, poured cold water on the optimism: “Raising rates just once is far from enough. The BOJ needs to commit to continuous hikes through 2026 to truly change the situation.”

Why? Because the US-Japan interest rate differential is still significant. As long as the spread remains, arbitrage trading will continue, and the dollar will still exert pressure to push up the Yen.

Jane Foley of Rabobank pointed out an interesting contradiction: market fears of intervention can themselves suppress the dollar’s rally, which in turn reduces the actual need for authorities to intervene. In other words, jawboning might be more effective than actual action.

Bottom line

The current situation is: government intervention rhetoric + rate hike expectations are boosting the Yen in the short term, but fundamentally, the interest rate differential pattern remains unchanged. How far the Yen’s rebound from its historic lows can go depends on how the Fed’s December meeting unfolds. Until then, the market can only wait.