Analysts Warn of Yen Weakness if BOJ Delays Rate Hike

Insights – The Bank of Japan (BOJ) may raise its benchmark interest rate in December, marking its third hike within a year—a first since the 1989 asset bubble era.  

In a recent interview, BOJ Governor Kazuo Ueda stated that the timing for the next rate hike is "approaching," driving the yen higher as USD/JPY briefly fell below 150 on December 2. Japan's 2-year government bond yield also rose to 0.625%, the highest since 2008.  

Market expectations for a December hike have climbed to 61%, doubling from a month ago. If implemented, this would follow rate hikes in March and July, marking another major policy shift.  

Source: TradingView; USD/JPY

Ueda’s use of "approaching" suggests imminent action but leaves room for a hike in either December or January. Some economists believe political factors, including challenges faced by Prime Minister Shigeru Ishiba after his coalition lost its majority, could delay the decision until January. BNP Paribas analysts noted that political instability could lead the BOJ to wait.  

Meanwhile, Naomi Muguruma, a BOJ observer, argued that Ueda’s participation in a rare media interview likely signals a December hike. She suggested that if the BOJ were considering a January hike, such a signal would be unnecessary at this time.  

Okasan Securities’ Chief Economist Ko Nakayama also expects a December hike, warning that if the Fed adjusts rates and the BOJ does not, it could weaken the yen and disrupt markets.  

Both the BOJ and the Federal Reserve are set to announce rate decisions on December 19. Traders currently estimate a 67% likelihood of a Fed rate cut in December, raising the stakes for the BOJ’s decision.