## Market Expectations Surge! Is the Yen Appreciation Trend Confirmed?

In December, expectations for the Bank of Japan to raise interest rates suddenly intensified, with overnight index swap data showing that market bets on a rate hike have exceeded 80%. This shift in expectation stems from recent statements by BOJ Governor Kazuo Ueda—he explicitly stated that he will carefully assess the pros and cons of a rate hike in December, leaving ample policy space for year-end actions. Several institutions, including BNP Paribas, immediately moved the timing of the rate hike forward from January next year to this month, reinforcing market expectations for a rate increase.

In contrast, Goldman Sachs remains more cautious, believing that the central bank may want to observe more corporate wage data before making a decision, and that a rate hike in January still has a high probability.

**US-Japan Interest Rate Differential Narrows, Carry Trade Closes Out**

Contrary to the BOJ's hawkish shift, market expectations for a Fed rate cut in December are as high as nearly 90%. The rapid narrowing of the interest rate differential between the US and Japan is driving the unwinding of the previously booming yen carry trade over the past few years.

According to trading analysis, as this arbitrage position is unwound, the yen against the dollar is expected to appreciate significantly. USD/JPY has already fallen to 154.66, hitting a two-week low. Market participants note that the rapid rise in the yen exchange rate is causing new shocks to the market landscape, especially putting pressure on trading positions that rely on yen depreciation.

**Can the Yen's Rally Continue? Here's the Next Target**

Mitsubishi UFJ Financial Group analyst Lee Hardman predicts that as expectations for a BOJ rate hike continue to heat up, the yen's appreciation trend is likely to be reinforced in the short term. He points out that early in 2026, USD/JPY could further approach the 150 level. This suggests that there is still room for yen appreciation, but the pace of rise may slow down.

Overall, under the dual influence of the BOJ's policy shift and the unwinding of carry trades, the yen's rally has become a market focus. Whether it can continue to break through in the future depends on the final interest rate decision by the central bank and the progress of corporate wage data.