USD/JPY surges past 158! The game behind the Bank of Japan's signal to raise interest rates

The Yen Under Pressure: The Logic Behind the Rapid Exchange Rate Surge

This week, the market experienced a significant turning point. The USD/JPY exchange rate surged to 157.78 on Thursday (November 20), just one step away from the 158.0 level, hitting a new high since mid-January. Behind this sharp rally in the forex market reflects the complex interplay between Japan’s fiscal and monetary policies.

At the same time, Japan’s 10-year government bond yield rose to 1.842%, reaching a phased high. Investors sold off Japanese bonds and yen on a large scale, driving the USD/JPY higher. This phenomenon is not accidental—it directly stems from market expectations adjustments regarding Japan’s future policy directions.

Economic Weakness vs. Fiscal Expansion: A Contradictory Dilemma

Data released on Monday (November 17) showed Japan’s Q3 GDP contracted by 1.8% annualized quarter-over-quarter, marking the first negative growth in six quarters. While economic growth remains sluggish, the Japanese government is contemplating an ultra-large-scale stimulus package—Osaka City is considering an additional budget of about 14 trillion yen for this fiscal year, potentially exceeding last year’s 13.9 trillion yen.

This massive budget reflects policymakers’ dilemma. Poor economic data requires stimulus, but excessive stimulus could further worsen Japan’s already fragile fiscal situation. RBC BlueBay Asset Management Chief Investment Officer Mark Dowding warned that if Osaka City’s policy credibility is damaged, it could lead investors to start selling off all assets. Once the market perceives increased doubts about Japan’s policy mistakes, institutions might increase short positions on the short end of the curve, hedging against potential market volatility by shorting short-term bonds.

The Bank of Japan’s Policy Normalization Is Inevitable

On Thursday, BOJ Policy Board member Junko Koide sent a key signal—an interest rate hike could happen as early as next month. The BOJ’s rate decision is scheduled for December 19, which means that during the U.S. rate hike cycle, the BOJ may also initiate its own monetary policy normalization process.

Her statement is not unfounded. Japan’s key inflation indicators have remained near or above the BOJ’s target level for three and a half years. The persistent inflationary pressure provides fundamental support for rate hikes. However, September’s real wages declined for the ninth consecutive month, highlighting the enormous pressure on Japanese households’ purchasing power. The continued weakening of the yen will further exacerbate this situation.

Long-term Concerns Over Yen Weakness Amid U.S. Rate Hikes

Under the backdrop of U.S. rate hikes, the yen faces systemic depreciation pressure. When the yen depreciates alongside rising inflation, ordinary households’ real purchasing power is doubly eroded—imported goods become more expensive, while local wages decline. This is the underlying reason why the BOJ is compelled to push for rate hikes.

Japanese Finance Minister Shunichi Katayama has repeatedly issued verbal warnings, emphasizing concerns over recent one-way and rapid forex fluctuations, and stressing the importance of exchange rate stability reflecting fundamental factors. The implicit message is that the government is trying to create a favorable public opinion environment for the BOJ’s rate hike policy, while warning that excessive depreciation is unacceptable.

Industry Concerns: Potential for “Stock, Forex, and Bond Triple Kill”

T&D Asset Management Chief Strategist Hirotada Ando said that the 25 trillion yen stimulus scale is indeed large, but market doubts its necessity. He worries that after the stimulus announcement, a scenario of “triple kill”—stocks, forex, and bonds—could occur, similar to the market turmoil when Liz Truss took office in the UK in 2022.

TDSecurities Singapore Macro Strategist Alex Loo shares a similar view: if Osaka City proposes a “large-scale budget,” Japan’s long-term government bond yields could further rise, and the yen-dollar exchange rate might weaken toward 160.

Technical Outlook: Watch Resistance at 160.0 and the Time Window

The daily chart shows that the RSI of USD/JPY is already in overbought territory, indicating the exchange rate is accelerating upward, maintaining a bullish short-term trend. If USD/JPY stabilizes around 157.0, further rebound toward 160.0 is expected. Investors should pay attention to the time window around November 27, remaining alert to potential trend reversals.

The market is currently in a phase of resonance between policy expectations and technical signals. On one hand, U.S. rate hikes continue to support the dollar’s strength; on the other hand, expectations of BOJ rate hikes are gradually materializing; the dual pressure on the yen is forming a complete feedback loop. In the short term, the key levels at 158.0 and 160.0 will determine the subsequent direction of the exchange rate.