The global financial market is watching every signal from Tokyo, amid growing speculation that the Bank of Japan (BOJ) will soon raise interest rates - the first time in nearly two decades. However, investors remain steadfast in the belief that the Yen will continue to weaken against the USD, even as the Japanese monetary policy shows signs of reversal.
According to Bloomberg, traders at Bank of America, Nomura Holdings and RBC Capital Markets said that their market position is currently leaning towards the USD continuing to strengthen. Citigroup's "pain" index - a measure of the level of markedness in trading positions - remains below 0, showing a prolonged pessimism for the Yen.
It is noteworthy that the positions of selling fake Yen are still maintained, even after BOJ Governor Kazuo Ueda clearly signaled that the central bank is ready to raise interest rates in December, if there is no major shock to the economy or financial markets.
The trading situation is still leaning towards the USD/JPY scenario of a slight increase until the end of the year. It will take a real shock from the BOJ to reverse this trend, said Ivan Stamenovic, head of the G10 currency trading division for Asia - Pacific at Bank of America. According to him, Ueda's "hawlish" statement has sparked controversy, but not enough to turn market sentiment.
The long-term weakness of the Yen could have double consequences. On the one hand, it pushes up import costs, putting more pressure on already hot inflation; on the other hand, it threatens Prime Minister Sanae Takaichi's efforts to reduce spending burdens for people amid a storm of living costs. Finance Minister Satsuki Katayama has repeatedly tried to intervene, but the Yen has only recovered weakly, although the BOJ has given clearer signals about the possibility of tightening policy.
According to Sagar Sambrani, a foreign exchange options trading expert at Nomura, the current positions reflect the view that the BOJ will maintain a "compromise" stance in the medium term, even if inflation far exceeds the 2% target. After Ueda's statement, hedge funds have slightly reduced their USD/JPY buying positions, but "most of them have kept this trading unchanged," he said.
Data from CME Group also shows a similar trend: Just one day after Ueda's speech, the USD/JPY buying options bet pair increased by about 40% compared to the selling options.
The market is now waiting for the Japanese wage report to be released early next week, a factor that could consolidate or shake the basis for the decision to increase interest rates. The exchange market is currently pricing in a 91% chance of a 0.25 basis point interest rate hike, up sharply from 58% at the end of November.
However, the general consensus is still leaning towards a weak Yen. UBS Group AG recently adjusted its exchange rate forecast to 158 Yen/USD at the end of the year, down 152 levels previously. Bank of America even predicts that the Yen could fall below 160 Yen/USD in the first quarter of 2026.
At the end of last weekend's session, the Yen stood at 155.33 Yen/USD, reflecting the belief that even if interest rates increase, the yield gap between the US and Japan will still be too large to reverse capital flows.
