Japanese Yen Trend Analysis: The Dilemma Between Central Bank Rate Hikes and Economic Stimulus

The Bank of Japan faces a critical decision. The USD/JPY has recently risen to 157.89, just one step away from the 160 threshold. The market generally expects that without strong measures from the central bank, breaking through 160 is only a matter of time.

Fiscal Stimulus Fuels the Rise, Yen Under Increased Pressure

On November 21, the Japanese government officially approved a support plan totaling 21.3 trillion yen, the largest supplementary budget since the pandemic. The core of the plan is to address rising prices, with 11.7 trillion yen directly allocated for price relief, and the remaining funds invested in key development areas.

Regarding funding sources, the government will raise funds through tax revenue growth driven by inflation and the issuance of new government bonds. The Japanese Cabinet plans to approve the supplementary budget by November 28 at the latest and seek parliamentary approval before the end of the year.

Following this announcement, market reactions were swift. On November 20, the yield on 10-year Japanese government bonds rose to 1.842%, a new high since 2008. At the same time, USD/JPY also hit a 10-month high.

Currency Depreciation Intensifies Price Pressures, Central Bank in a Dilemma

Bank of Japan Governor Kazuo Ueda’s assessment of the current situation warrants attention. He pointed out that the continued weakness of the yen is further raising inflation expectations—imported goods prices are rising due to currency depreciation, and companies are more inclined to increase wages and prices.

Ueda emphasized that the transmission mechanism of exchange rate fluctuations to prices is strengthening, and the central bank must remain vigilant. This statement is interpreted by the market as a signal that he leans toward raising interest rates at the December policy meeting.

However, raising interest rates conflicts with the government’s large-scale economic stimulus plan. Rate hikes would suppress economic growth and increase borrowing costs, while the 21.3 trillion yen support plan aims to stimulate the economy. The tension between these policies has become a focal point for market attention.

The 160 Level Becomes a Market Benchmark

The 160 level has become a key technical and psychological threshold. Japanese authorities have intervened multiple times in this range last year, attempting to stabilize the yen.

Australian National Bank forex strategist Rodrigo Catril’s view reflects the market consensus. He believes that without supporting fiscal or monetary discipline, intervention is often limited in effect and may create opportunities for traders betting against the yen. He expects that if the central bank raises rates in December, USD/JPY could fall below 150; but if the bank chooses to hold steady, breaking through 160 will be highly likely.

Ultimately, the yen’s trajectory will depend on the central bank’s decision—whether a rate hike can be the key to reversing the trend, or whether the need for economic stimulus will force the bank into passivity. The answer will be revealed in the December monetary policy meeting.