The Bank of Japan signals a rate hike, is the yen facing a turning point? USD/JPY directly targets 158

Recently, Japan's macroeconomic situation has been undergoing subtle changes. BOJ Policy Board Member Junko Koide recently hinted that a rate hike could be initiated as early as the December 19th interest rate decision next month, emphasizing that "normalization" of monetary policy has become an inevitable trend. This statement ignited market expectations for the start of Japan's rate hike cycle and also pushed USD/JPY to a new high since January last week, reaching 157.78, just one step away from the 158 psychological level.

**Economic Data Supports Rate Hike Expectations**

The support for the BOJ's rate hike signals comes from Japan's persistently high inflation. Data shows that Japan's key inflation indicators have remained near or above the BOJ's target for three and a half years, providing a solid fundamental basis for a rate increase. Meanwhile, real wages in September declined for the ninth consecutive month, putting substantial pressure on household purchasing power. The continued depreciation of the yen is exacerbating domestic inflation pressures—forming a negative feedback loop that increases the urgency for the BOJ to act.

It is worth noting that Japan's GDP for the third quarter, released last week, contracted at an annualized rate of 1.8%, marking the first negative growth in six quarters. The sluggish economic growth contrasts with sticky inflation, adding complexity to the BOJ's policy decisions.

**Government Stimulus Plan Implies Risks**

Japan's new Prime Minister Sanae Takaichi plans to announce an economic stimulus package this Friday. Reports suggest the government intends to add about 14 trillion yen to the budget for this fiscal year, potentially exceeding last year's 13.9 trillion yen. The large-scale fiscal expenditure plan has raised market concerns—if the stimulus exceeds expectations, it could further worsen Japan's fiscal risks and may become misaligned with the BOJ's rate hike intentions.

RBC BlueBay Asset Management Chief Investment Officer Mark Dowding warned that if Takaichi's policy credibility is damaged, it could trigger a wave of asset sell-offs among investors. Concerns about policy missteps in Japan are rising, which might lead institutional investors to short the short-term yield curve, betting on increased volatility in Japanese bonds.

Hiroshi Tameoka, Chief Strategist at T&D Asset Management, also expressed similar concerns—does such a large-scale budget really need to be implemented? He warned that after the stimulus announcement, there could be a "triple sell-off" in stocks, bonds, and currencies, similar to the market turmoil when Liz Truss took office in the UK in 2022. Alex Loo, a macro strategist at TDSecurities Singapore, further pointed out that if the stimulus scale is indeed large, Japan's long-term government bond yields could rise further, and the yen against the dollar might depreciate toward 160.

**Bonds Market Reacts First**

Market expectations are already reflected in the bond market. Last Thursday, Japan's 10-year government bond yield rose to 1.842%, hitting a new high. Japanese Finance Minister Shunichi Suzuki repeatedly issued verbal warnings, emphasizing concerns over recent one-sided and rapid currency fluctuations, calling for attention to excessive and disorderly movements, and stressing that exchange rate stability and fundamentals are crucial.

**USD/JPY Technical Outlook: Critical Moment Approaching**

From the daily chart, USD/JPY RSI is in overbought territory, indicating the exchange rate is accelerating upward. The short-term bullish trend is clear; if the exchange rate stabilizes around 157.0, further rebound attempts toward 160.0 are likely. Market participants should pay close attention to the time window around November 27, watching for potential reversal signals.

Overall, the combination of the BOJ's rate hike signals, expectations of above-forecast stimulus, and persistent high inflation are creating multiple impacts on the yen exchange rate and bond markets. Investors should closely monitor the December BOJ interest rate decision and government stimulus details, as these will determine whether the rate hike expectations for the yen can materialize and ultimately influence the future trend of USD/JPY.