Yen takes centre stage as BoJ prepares to hike

The Bank of Japan looks set to close the year with another rate increase, yet the yen is struggling to benefit. Governor Ueda has indicated that the Policy Board will weigh the pros and cons of raising rates at the 19 December meeting, helped by firmer wage demands for fiscal 2026 and concern that recent currency weakness could unsettle inflation expectations. Markets have moved quickly. The probability of a December move has climbed to around 80% from roughly 60% a week ago, and the BoJ now stands as the only major central bank still in a tightening phase, slowly narrowing rate differentials with the United States.

Even so, the currency reaction has been underwhelming, which highlights how hesitant the BoJ’s normalisation has been. A slow and cautious hiking cycle, on its own, is proving insufficient to offer the yen lasting support against the dollar.

JPY and crosses

The sharp push in USD/JPY above 150 in October surprised many, ourselves included, and by mid November the consensus was that only heavy official intervention near 160 would cap the move. Questions about whether the yen had lost its safe haven appeal grew louder, although a relatively calm risk backdrop meant that this characteristic had not really been tested.

That assessment is now shifting. A 25bp hike is almost fully priced for 19 December and the one month JPY OIS rate, two years forward, has risen to about 1.47% from 1.14% over the past month. The new government may favour reflation, but it does not appear willing to tolerate a persistently weak yen that would aggravate an already acute cost of living squeeze, a key source of earlier political pressure on the LDP. Our central case is for USD/JPY to ease only gradually, with a modest 152 target by year end and 148 by the end of 2026.

In GBP/JPY, the cross failed to hold above 206.90 and has slipped into corrective mode, with recent gains capped around 206.30. The broader structure remains constructive while trade stays within the existing bullish channel, and initial support is seen near 205.20. This keeps scope for renewed upside towards 207.65 and 208.20, with an expected intraday range today between 205.80 and 207.65.

Looking ahead

The key question for the coming months is whether BoJ tightening accelerates or whether global risk sentiment finally turns, allowing the yen’s defensive qualities to reassert themselves. As long as the adjustment in Japanese rates remains gradual and external conditions stay benign, yen strength is likely to be limited and prone to setbacks. A more decisive shift in BoJ guidance, or a sustained deterioration in global growth and risk appetite, would be needed to unlock a more durable recovery in the currency.