Is the USD/JPY exchange rate about to reverse? The December central bank decision could be the key turning point

The policy game between the Bank of Japan and the Federal Reserve is quietly rewriting the USD/JPY exchange rate trend.

The threefold drivers behind the retreat from high exchange rates

USD/JPY exchange rate has recently experienced a significant correction, falling from its early-year high and breaking below the 156 level. This change is no coincidence—it reflects the market’s reassessment of Japan’s policy stance. Senior Japanese government officials have issued strong signals, stating that they will closely monitor abnormal foreign exchange market fluctuations and be fully prepared to intervene if necessary. This statement immediately triggered a chain reaction: on one hand, the further weakening of USD/JPY gained policy support; on the other hand, the market began to reassess the Bank of Japan’s monetary policy stance.

Sources reveal that the Bank of Japan is preparing for a possible rate hike in December. The news directly boosted market expectations of a hawkish shift by the BOJ. As a result, the previously strengthening dollar against the yen came under pressure, and market sentiment shifted 180 degrees.

How likely is a December rate hike?

Market expectations show that investors are almost evenly split on whether the Bank of Japan will raise rates in December or January, with both probabilities around 50%. This standoff reflects the market’s real dilemma: will the BOJ take action in December?

The key variable lies with the Federal Reserve. If the Fed maintains interest rates before the BOJ meeting, it will directly increase the likelihood of a rate hike by the BOJ; conversely, if the Fed cuts rates, the BOJ will have more “waiting reasons.” Analysts at Commonwealth Bank of Australia believe that the BOJ may choose to wait until the parliamentary budget passes before acting, thus avoiding political risks and gaining more time to study wage negotiation data.

Will USD/JPY rise or fall? Arbitrage trading becomes crucial

From a technical perspective, the rising expectations of a BOJ rate hike combined with the increasing anticipation of a Fed rate cut are continuing to compress the US-Japan interest rate differential. This narrowing typically weakens the dollar’s attractiveness and supports yen appreciation—constituting a substantial bullish factor for USD/JPY.

However, deep-seated concerns remain. There is still a significant interest rate differential between Japan and the US, and arbitrage trading based on this spread has not truly subsided. UBS forex strategists state that a single rate hike is far from enough to reverse Japan’s long-term yen depreciation trend. The BOJ must commit to continuous rate hikes through 2026 and set clear inflation control targets for a sustainable reversal of USD/JPY.

The Dutch bank’s perspective is even more thought-provoking: the threat of government intervention itself may serve as a “deterrent.” If this deterrent is strong enough to curb market enthusiasm for the dollar, actual intervention may become unnecessary. In other words, market expectations of intervention might have already priced in its potential effects.

How should traders respond?

The next move of USD/JPY depends on the synchronized signals from three variables: the Fed’s decision in early December, the BOJ’s policy announcement on the 19th, and the government’s attitude toward exchange rate fluctuations. Currently, the market is in a typical “observation period”—any subtle change in policy tone could trigger a new round of intense volatility.

For traders focused on USD/JPY, this is a high-risk, high-reward period. While policy uncertainty increases volatility, it also offers opportunities for traders to precisely identify reversal points. The key is to closely monitor every change in central bank communication ahead of the meetings.