Bank of Japan's December decision approaching: After the rate hike, who will dominate the currency market?

December 19th’s Bank of Japan interest rate decision is highly anticipated. The market widely expects the central bank to raise the benchmark interest rate to 0.75%, hitting a 30-year high, which will also mark a key turning point in asset liquidity flows.

“Hiking” is Priced In, Focus Shifts to Forward Guidance

From a technical perspective, the 0.75% interest rate target has been fully digested by the market, and the real uncertainty lies in Governor Ueda and男’s statements on the policy path. The core concern for investors is: will the Bank of Japan revise its estimate of the neutral interest rate?

Currently, the consensus expectation is that—the lower bound of the neutral rate may be raised from 1.0%, directly affecting investors’ judgment of the terminal rate. According to market pricing, Japan’s policy rate could rise to 1.0% before September 2026. However, Nomura Securities believes this expectation may be overly aggressive, and the market’s assessment of the central bank’s hawkishness might be overestimated.

Carry Trades or “Butterfly Effects” May Emerge, but Risks Are Limited

The most direct consequence of the rate hike is the tidal change in USD/JPY arbitrage trading. Once this large cross-border capital position is closed, it could trigger a chain reaction: high-risk assets like US stocks and Bitcoin may face selling pressure, and regional currencies such as the Philippine peso against the dollar could also be affected.

A precedent occurred in July 2024. When the Bank of Japan unexpectedly announced a rate hike to 0.25%, carry trades were significantly unwound, causing the yen to appreciate sharply in the short term, leading to synchronized declines in US stocks and Bitcoin.

However, the impact of this rate hike is expected to be much milder. On one hand, the market has already priced in the fundamentals of this rate increase; on the other hand, the Japanese government’s ongoing large-scale fiscal support policies continue to suppress excessive yen appreciation. These two factors together limit the disturbance to global markets from this rate hike.

Narrowing US-Japan Interest Rate Differential, “Hawkish” or “Dovish”?

US banks and Nomura Securities have differing views on the yen’s trajectory.

The US bank’s outlook is more dovish: assuming the central bank signals a relatively moderate policy stance, USD/JPY could approach 160 early next year and remain relatively high throughout the year. The institution forecasts target prices for 2026 as follows: 160 (Q1), 158 (Q2), 156 (Q3), 155 (Q4).

Nomura Securities is more optimistic about yen appreciation: they point out that yen depreciation is causing domestic political issues, and with the US-Japan interest rate differential narrowing, the attractiveness of carry trades is diminishing. They predict USD/JPY will step down in a ladder pattern in 2026: 155 (Q1) → 150 (Q2) → 145 (Q3) → 140 (Q4), which is at least 15 percentage points lower than the US bank’s forecast.

The fundamental reason for this divergence is the differing judgments on the central bank’s policy tone—US banks lean towards a dovish interpretation, while Nomura foresees a gradual shift from easing to neutral.

Investment Implication: Wait for Clear Policy Signals

This month’s central bank meeting is less about the rate hike itself and more about how Ueda and男 describe the future interest rate path. The greater the disagreement among institutions, the more room there is for policy communication, and the more elastic the market’s response. For investors tracking USD/JPY and carry trade assets, the current situation is akin to “storm clouds gathering.”