Yen interest rate hike expectations intensify, USD/JPY approaches the 158 level, market volatility may increase

The recent policy shift by the Bank of Japan is triggering a chain reaction in the financial markets. The USD/JPY exchange rate continues to rise, reaching a high of 157.78 on Thursday (November 20), just shy of the 158.0 threshold, marking a new high since mid-January. Behind this rally lies a deep contradiction between Japan’s economy and its policies.

Economic Weakness and the Dilemma of Stimulus Measures

Japan’s recently released third-quarter GDP data is concerning. On a quarterly annualized basis, GDP declined by 1.8%, marking the first negative growth in nearly six quarters and highlighting insufficient economic momentum. Facing this predicament, the Japanese government is planning a large-scale economic stimulus package, which is expected to be officially announced on Friday.

According to market expectations, the new Prime Minister Sanae Takaichi’s government intends to allocate approximately 14 trillion yen in additional budget for this fiscal year, surpassing last year’s 13.9 trillion yen. Such a large-scale stimulus measure immediately raises concerns among investors about Japan’s fiscal sustainability and also intensifies market worries about the yen’s outlook.

Rising Expectations of Yen Rate Hikes, Central Bank Signals Clear Intentions

In this context, the stance of the Bank of Japan becomes particularly crucial. Policy Board member Junko Koeda explicitly hinted on Thursday that an interest rate hike could be implemented as early as next month (the BOJ rate decision is scheduled for December 19). This statement has been widely interpreted by the market as the central bank believing that “normalization” of monetary policy is unstoppable.

Koeda’s remarks are not unfounded. In fact, Japan’s key inflation indicators have remained around the central bank’s target level for three and a half years, and in September, real wages fell for the ninth consecutive month. These data points show a mixed picture: while price pressures persist, households’ real purchasing power is being eroded, leading to a stagflationary dilemma.

Policy Makers United, Exchange Rate Stability as Top Priority

Japan’s Finance Minister Shunichi Suzuki has expressed clear concern over recent currency market volatility. He has repeatedly warned that the recent one-sided and rapid fluctuations in the exchange rate are worrying, and excessive and disorderly movements must be closely monitored. Achieving exchange rate stability in line with fundamentals remains the ideal goal.

The continued weakening of the yen itself poses new risks. A depreciating local currency means higher costs for imported goods, which could further exacerbate domestic inflationary pressures, creating a vicious cycle. Meanwhile, Japanese government bond yields are also rising; on Thursday, the 10-year Japanese government bond yield climbed to 1.842%, reflecting a reassessment by investors of Japan’s long-term risks.

Experts Warn: The “Three Kill” Risks Cannot Be Ignored

International asset management firms are cautious about future developments. RBC BlueBay Asset Management Chief Investment Officer Mark Dowding pointed out that if the credibility of Takaichi’s policies is damaged, it could trigger a large-scale sell-off of assets by investors. Once markets start questioning the correctness of Japan’s policy decisions, the firm would consider increasing short positions on the short end of the yield curve.

T&D Asset Management’s Chief Strategist and Fund Manager Hiroshi Iimori expressed concerns about the scale of the stimulus plan. He worries that the 14 trillion yen budget could be too large, and its announcement might trigger a “triple kill” of stocks, bonds, and currencies, similar to the market turmoil caused when UK Prime Minister Liz Truss took office in 2022.

Singaporean macro strategist Alex Loo shares the same view, believing that if Takaichi unveils a “large-scale budget” plan, Japan’s long-term government bond yields could rise further, and the USD/JPY exchange rate might depreciate further toward 160.

Technical Perspective: Key Time Windows and the 160 Level

From the daily chart of USD/JPY, the RSI indicator has entered overbought territory, indicating that the exchange rate is experiencing an accelerated upward phase, with a short-term bullish bias. If USD/JPY can hold above the 157.0 support level, subsequent rebounds could challenge the important resistance at 160.0.

Market participants should pay particular attention to the time window around November 27. During this period, multiple factors such as policy announcements and central bank meeting expectations could converge, potentially triggering a major reversal in the exchange rate. Investors should stay alert and closely monitor market developments during this sensitive period.