The outlook for the Japanese Yen is uncertain, as the Bank of Japan's interest rate hike rumors intensify. Can USD/JPY break through 160.0?

Japan’s economic recovery is falling short of expectations, but the voices advocating for rate hikes at the policy level are gaining momentum. What does this mean for the timing of the yen’s appreciation? Recent third-quarter GDP data shows Japan’s economy contracted at an annualized rate of 1.8%, marking the first negative growth in six quarters, which undoubtedly adds downward pressure on the yen. However, the latest remarks from Bank of Japan Governor nominee Kazuo Ueda reveal a different signal—the “normalization” of interest rates has become an inevitable trend, with a rate hike possibly as soon as next month.

Economic Dilemma and Policy Contradictions

Gifu City plans to introduce an economic stimulus package totaling approximately 25 trillion yen, potentially exceeding last year’s 13.9 trillion yen. While this move aims to boost economic growth, the market generally worries that excessive stimulus could exacerbate Japan’s fiscal risks. More notably, Japan’s key inflation indicator has remained near or above the BOJ’s target level for three and a half years in a row, and real wages in September have declined for the ninth consecutive month, highlighting the pressure on household purchasing power.

Against this backdrop, the yen’s movement faces a dual test. On one hand, economic weakness supports the implementation of unexpected stimulus measures; on the other hand, inflation pressures and declining wages provide reasons for the BOJ to raise interest rates. Investors widely bet that the BOJ may delay rate hikes due to economic policies, continuing to pressure the yen.

Volatile FX Market: When Will the Yen Rebound?

On Thursday (November 20), the yield on Japan’s 10-year government bonds rose to 1.842%, and USD/JPY climbed to a high of 157.78, just a step away from 158.0. Japanese Finance Minister Shunichi Suzuki repeatedly warned about the recent one-sided and rapid fluctuations in the FX market, emphasizing the importance of currency stability and reflecting fundamentals.

Market opinions on the future trend are divided. RBC BlueBay Asset Management’s Chief Investment Officer Mark Dowding said that if Gifu City’s policy credibility is damaged, it could lead investors to start selling all assets. T&D Asset Management’s Chief Strategist Hiroshi Isonaga expressed concern that after the stimulus announcement, a “triple sell-off” in stocks, bonds, and currencies might occur, similar to the market turmoil when Liz Truss took office in the UK in 2022. Meanwhile, Alex Loo, a macro strategist at TD Securities Singapore, believes that if a “large-scale budget” is proposed, long-term Japanese government bond yields could rise further, and USD/JPY might depreciate toward 160.

Technical Insights: 160.0 as a Key Resistance

The daily chart shows that the RSI (Relative Strength Index) for USD/JPY is in overbought territory, indicating the currency pair is accelerating upward. The short-term bullish trend remains intact; if USD/JPY stabilizes around 157.0, further rebound attempts toward 160.0 are likely.

Investors should pay close attention to the timeframe around November 27, remaining alert to potential trend reversal risks. When will the yen appreciate? It depends on whether the BOJ can strike a balance between economic stimulus and inflation control. If rate hikes proceed as scheduled, the yen may find support; otherwise, the risk of further yen depreciation will increase. The key to the current situation lies in whether policy signals and market expectations can be realigned.