The Federal Reserve's stance will determine the fate of the yen! Beware of the exchange rate reversal after December rate hikes

Recently, the yen is facing a critical "gamble." Whether the Bank of Japan will raise interest rates in December depends on how the Federal Reserve moves. This decision will directly influence the next direction of the USD/JPY currency pair.

**The Federal Reserve is the "decider" for the Bank of Japan's rate hike**

The market has already noticed an interesting phenomenon: the Bank of Japan is likely to announce a rate hike at the monetary policy meeting on December 19. But a week before that, the Federal Reserve will release its rate decision first. Many analysts have openly stated that the Bank of Japan is essentially "waiting" for signals from the Fed.

The logic is simple—if the Fed holds steady, the pressure on the Bank of Japan to raise rates will increase; if the Fed cuts rates instead, the BOJ might choose to hold off. According to the latest market surveys, investors are evenly split with 50% expecting the BOJ to raise rates in December or January, indicating clear disagreement on the timing of the rate hike.

Analysts at Commonwealth Bank of Australia suggest that the Bank of Japan may adopt a "cautious strategy," waiting until the parliament passes the budget before making a decision. Such a delay not only addresses political considerations but also gives the central bank time to study the progress of upcoming wage negotiations.

**Yen exchange rate is "at a critical point," but downward pressure remains**

The most direct signal comes from the exchange rate itself. Under the dual influence of expectations of government intervention and hawkish signals from the central bank, USD/JPY has fallen sharply from recent highs, even briefly dropping below the critical 156 level on November 27. This led many to believe that the era of yen appreciation has finally arrived.

However, UBS forex strategists issued a warning: this may be just a false alarm. They pointed out that even if the Bank of Japan does raise rates in December, a single rate hike alone is insufficient to reverse the long-term depreciation trend of the yen. Unless the BOJ commits to continuous rate hikes through 2026 and controls inflation, the effect of a rate increase will be quite limited.

More critically, the interest rate differential between Japan and the US remains huge. When the interest rate gap exists, arbitrage trading continues—investors keep borrowing low-interest yen to invest in dollar assets, which keeps fueling the USD/JPY upward pressure.

**Will Japanese government intervention truly change the game?**

Japanese Prime Minister Fumio Kishida expressed strong concern about the exchange rate on November 26, stating that the government is prepared to take "necessary" action in the foreign exchange market at any time. This statement indeed temporarily suppressed USD/JPY.

But strategists at ING Bank pointed out a subtle perspective: market fears of intervention may itself be enough to curb the dollar's rally, reducing the actual need for authorities to intervene. In other words, just talking about intervention might already have an effect.

**What should traders focus on?**

The current situation involves multiple uncertainties. The widening US-Japan interest rate differential, the Fed's policy direction, and the BOJ's final decision on rate hikes—any change in these factors could trigger sharp volatility in the yen exchange rate. Investors need to remain vigilant about the risk of a reversal after rate hikes—seemingly on the verge of raising rates, the currency might continue to depreciate. This is the true test of trading wisdom.