Can the Japanese Yen exchange rate rebound after hitting its lowest point in history? Can the central bank's interest rate hike break the deadlock?

The recent fluctuations in the Japanese Yen exchange rate have been capturing the attention of global investors. The USD/JPY pair repeatedly hitting new highs and the Yen reaching its lowest level in history have raised concerns in the market. What exactly is driving the Yen’s continued depreciation? The answer points to a tug-of-war in policy dialogues between Japan and the United States.

Rising Calls for Government Intervention, Initial Signs of Yen Reversal

On November 26, Japanese Prime Minister Sanae Sato made a statement that triggered market turbulence. The government will closely monitor exchange rate fluctuations and is prepared to take necessary measures in the foreign exchange market at any time. Following this remark, the market sensed the possibility of intervention.

As expected, the USD/JPY pair retreated from its high, briefly falling below the 156 level at the time of writing. Does this mean the era of the Yen’s historic lows is about to reverse? Industry insiders reveal that the Bank of Japan is preparing for a possible rate hike as early as December, with hawkish voices growing louder, and market sentiment shifting accordingly.

The Federal Reserve is the Real Puppet Master; Outlook for Rate Hikes by Central Banks Remains Uncertain

On the surface, Japan’s potential rate hike appears to be the main driver behind the Yen’s rebound. However, in reality, the decision of the Federal Reserve is the true determining factor.

On December 19, the Bank of Japan will announce its interest rate decision, while the Federal Reserve will release its decision a week earlier. This time gap is crucial. Analysts point out that the Bank of Japan is likely to adjust its policy based on the Fed’s moves. The logic is simple: if the Fed maintains interest rates, pressure on the Bank of Japan to hike increases; conversely, if the Fed cuts rates, the Bank of Japan is more inclined to hold steady.

Currently, market expectations for rate hikes in December and January are each around 50%. Australian Commonwealth Bank analyst Carol Kong believes that the cautious Bank of Japan may choose to wait until the parliament passes the budget before raising rates, allowing more time for policy decisions and observing the subsequent wage negotiations.

After the Yen’s Historic Low, Will It Rebound or Continue to Fall?

The rising expectations of rate hikes, coupled with increasing expectations of Fed rate cuts, are gradually narrowing the interest rate differential between Japan and the US. This increases the probability of USD/JPY retreating from its highs, suggesting that the Yen’s historic lows may have bottomed out.

But don’t celebrate too early. The pressure on the Yen to depreciate has never truly dissipated, as the interest rate spread between Japan and the US remains substantial, and arbitrage mechanisms are still in play. UBS FX strategist Vassili Serebriakov explicitly states that a single rate hike cannot fundamentally reverse the Yen’s trend. The Bank of Japan must demonstrate hawkish stance and commit to further hikes into 2026 to control inflation, which could truly change the game. Currently, “the US-Japan interest rate differential remains large, and volatility is still low,” indicating limited room for a Yen rebound.

Jane Foley, Head of FX Strategy at Rabobank, warns that market concerns about intervention itself could become another force. If worries about intervention are enough to suppress the dollar’s rally, the government might not need to intervene directly, creating an interesting paradox.

Investors’ Dilemma: Waiting in Uncertainty

The current market is in a wait-and-see mode. The Yen’s future after reaching its lowest point in history depends on multiple variables—Federal Reserve stance, Bank of Japan’s resolve, government intervention willingness, and the timing of a retreat in arbitrage trading. Investors should remain cautious in the short term, as this policy tug-of-war is far from over.