The depreciation of the Japanese Yen is hard to stop unless the central bank intervenes with a rate hike

USD/JPY has approached 157.89, hitting a ten-month high. The market generally believes that unless the Bank of Japan takes a rate hike action in December, this upward curve is only a matter of time.

21.3 Trillion Yen Stimulus Plan Triggers Chain Reaction

On November 21, the Japanese government officially approved an economic stimulus plan totaling 21.3 trillion yen, the largest additional fiscal expenditure since the pandemic. Among them, price relief measures account for the largest share, reaching 11.7 trillion yen, aimed at addressing current inflationary pressures.

This funding will be raised through two channels: first, the tax revenue growth expectations accumulated during the pandemic; second, additional issuance of government bonds. The Japanese Cabinet plans to approve the supplementary budget on November 28, seeking parliamentary approval before the end of the year.

Bond Yields Surge, Exchange Rate Reacts

The chain reaction following the policy announcement immediately became evident. On November 20, the yield on Japan’s 10-year government bonds rose to 1.842%, reaching a new high since 2008. This figure fully reflects market concerns about Japan’s fiscal sustainability. Subsequently, the USD/JPY exchange rate accelerated upward, breaking through 157.89, a ten-month high.

Central Bank Governor’s Attitude Shifts, Rate Hike Expectations Rise

The Governor of the Bank of Japan, Kazuo Ueda, recently made noteworthy remarks. He pointed out that the continued depreciation of the yen could further increase inflationary pressures—imported goods costs rise as the yen weakens, prompting companies to raise wages and product prices.

Ueda emphasized that the impact of exchange rate fluctuations on prices is expanding, and the central bank needs to remain highly vigilant. This statement hints that he is inclined to support starting a rate hike cycle in December.

160 Level Becomes a Key Battleground, Market Watches Central Bank Moves

The 160 level holds special significance for Japanese authorities—Japan has intervened in the currency market multiple times around this range last year. However, ANZ Bank’s foreign exchange strategist Rodrigo Catril offers an interesting perspective:

“Pure market intervention, without coordination with fiscal or monetary policy, often only creates opportunities for those shorting the yen.” He stated that if the Bank of Japan indeed chooses to hike rates, the USD/JPY could fall back below 150. Conversely, breaking through 160 is only a matter of time.

This means that the future trend depends not on government intervention but on whether the central bank dares to raise interest rates.