Traders weigh the timing of the Bank of Japan's interest rate hike and the risk of government intervention. The yen has slightly rebounded.

The yen recovered some of its losses on Monday, as markets weighed the timing of further rate hikes by the Bank of Japan and the possibility of intervention by Japanese authorities during the quiet end-of-year trading period. As of the time of writing, the USD/JPY exchange rate was down slightly by 0.19%, at 156.27 yen to the US dollar. In December, the Bank of Japan raised its policy rate by 25 basis points to 0.75%, the highest level since 1995. Bank of Japan Governor Haruhiko Kuroda said at a press conference after the meeting that if price prospects materialize as expected, the central bank will continue to tighten policy. Minutes from the Bank of Japan meeting released on Monday showed that Bank of Japan officials believe that real interest rates in Japan are still very low, implying that there is room for further rate hikes in the future. However, disappointment among markets over the lack of clear guidance from the Bank of Japan on the timing of future monetary tightening led to a softening of the yen after the rate hike announcement. Last week, Japanese Finance Minister Satsuki Katayama issued a stern warning to speculators as the yen continued to weaken, stating that if the currency's movements did not match the fundamentals, Japanese authorities had "absolute freedom" to take bold actions. Katayama said, "The trend of yen depreciation is obviously not in line with the fundamentals, but speculative." "In response to this trend, we have clearly stated that we will take bold actions, as stated in the joint statement by the Japanese and US finance ministers." Bart Wakabayashi, Tokyo branch manager at Daifuku Bank, pointed out that while verbal warnings from Japanese authorities help limit the yen's decline, pessimism towards the yen is evident in other forex cross rates. He said, "I think holding long yen positions is quite painful. The market is still trying to figure out what role the yen plays in terms of safe-haven assets." Gradual tightening of monetary policy by the Bank of Japan faces structural weakness of the yen and bearish sentiment on Wall Street Pessimism towards the yen is not only evident in the forex market but also in views on Wall Street. After the Bank of Japan's rate hike in December failed to sustainably boost the yen, bearish sentiment towards the currency has increased, further reinforcing the view in the market that the structural weakness of the yen does not have a quick fix. Strategists at institutions like JPMorgan Chase and BNP Paribas predict that by the end of 2026, the yen may depreciate to levels like 160 yen to the US dollar or even weaker. Factors driving this prediction include significant US-Japan interest rate differentials, negative real interest rates, and continued capital outflows. These institutions believe that as long as the Bank of Japan continues its gradual tightening and fiscal-driven inflation risks persist, this trend will be difficult to reverse. Junya Tanase, JPMorgan Chase's chief forex strategist in Japan, said, "The fundamentals of the yen are quite weak, and there won't be much change next year." He offered one of Wall Street's most pessimistic forecasts, predicting that by the end of 2026, the USD/JPY exchange rate could reach 164. He noted that cyclical forces may further disadvantage the yen next year, as market expectations of higher interest rates in other regions will weaken the impact of the Bank of Japan's tightening policy. Parisha Saimbi, BNP Paribas' strategist for emerging Asia forex and rates, said that the global macro environment in the coming year should be relatively favorable for risk sentiment, which typically benefits arbitrage strategies. She forecasted that by the end of 2026, the USD/JPY exchange rate could rise to 160. She added that robust arbitrage demand, a cautious Bank of Japan, and a potentially more hawkish Federal Reserve than expected could keep the USD/JPY exchange rate high. It is worth noting that outflows of Japanese investments abroad are another source of pressure. Net purchases by Japanese retail investors of overseas equities through investment trusts hover around the ten-year high set last year - around 9.4 trillion yen (about $60 billion), highlighting a continued preference for foreign assets among households. Analysts believe that this trend may continue into 2026 and continue to suppress the yen. Corporate outflows of funds may be a more persistent driving factor. Shusuke Yamada, chief strategist for foreign exchange and rates at Bank of America Securities Japan, said in a report earlier this month that Japan's direct investment abroad has maintained a steady pace in recent years, hardly affected by cyclical factors or changes in interest rate differentials. Of particular note is that this year, the scale of Japanese corporate mergers and acquisitions abroad has risen to multi-year highs. Tohru Sasaki, chief strategist at Fukuoka Financial Group, said, "The weak yen situation has hardly changed. The key is that the Bank of Japan has not actively raised rates, and real interest rates are still deeply negative." He predicted that by the end of 2026, the USD/JPY exchange rate could reach 165, "I think the Federal Reserve has essentially completed its rate-cutting cycle. If the market begins to fully take this into account, it will also be a factor to push up the USD/JPY exchange rate." However, some yen observers still believe that as the Bank of Japan continues to normalize its policy, the yen will strengthen in the longer term. Goldman Sachs expects that over the next ten years, the yen could eventually rise to levels of 100 yen to the US dollar, but also admits that there are multiple short-term negative factors.