The night before the December 19th central bank decision: Yen depreciation expectations shattered? Three major institutions clash

Investors are holding their breath. On December 19th, a meeting that could reshape the global carry trade ecosystem is about to take place—the Bank of Japan’s interest rate decision is imminent.

On the surface, a 25 basis point hike to 0.75% is already a market consensus, but the real betting point lies in the implied meaning: how will Governor Ueda Haruhiko describe the future pace of rate hikes? This signal is determining the next flow of global funds.

How divided are market expectations?

Regarding neutral interest rates, the Bank of Japan may adjust its current lower bound estimate of 1.0%—this seemingly dull technical tweak actually hints at the outlook for the rate hike cycle.

The market currently prices in: by September 2026, rates will rise to 1.0%. But is this expectation aggressive enough? Nomura Securities has poured cold water on it, considering it too hawkish. On the other hand, U.S. banks and Nomura have a gap in their USD/JPY target prices—the former sees 160 in Q1 2026, while the latter is more pessimistic at 155. Behind this difference lies a fundamental disagreement over the pace of yen appreciation.

How intense will the rate hike impact be?

Returning to July 2024, an unexpected rate hike by the Bank of Japan (to 0.25%) triggered a reversal in carry trades—the yen surged, and U.S. stocks and Bitcoin fell sharply. Will history repeat itself?

This time, analysts are more moderate in their judgment. The rate hike news has already been fully digested, and the market shock has been released. More importantly, domestic fiscal stimulus policies in Japan are still ongoing, which is exerting downward pressure on the yen, offsetting the rate hike. Additionally, looking at the trends of RMB against Philippine Peso, USD against emerging market currencies, global risk assets are not showing signs of extreme fragility—this suggests that the impact of carry trade unwinding may be limited.

Yen, USD, emerging currencies: a triangular chess game

“Dovish rate hikes” versus “hawkish rate hikes” are painting two completely different futures.

If the central bank hints at a gradual pace of future rate hikes (dovish signal), USD/JPY could stay high or even surge to 160. Carry trades continue to profit, and emerging market assets remain under pressure.

If the central bank adopts a tough stance (hawkish signal), short covering of the yen will begin, and USD/JPY could adjust down to 150. But this is less likely—that’s the market consensus.

Nomura’s forecast is more aggressive: as yen appreciation pressures increase and the U.S.-Japan interest differential narrows, the attractiveness of yen arbitrage diminishes each quarter, and USD/JPY could decline all the way to 140 by 2026. This would fundamentally reshape the exchange rate landscape.

The key moment is just ahead. Every word from the central bank could reshape the global capital map.