In-Depth Analysis of the Yen Appreciation: Central Bank Policy Divergence and the Perfect Storm of Dollar Weakening

The foreign exchange market has recently experienced a remarkable shift, with the Japanese yen showing clear signs of reversal. This change is not accidental but the result of multiple factors converging. The yen’s appreciation is mainly driven by the stark contrast between the Fed’s dovish expectations and the Bank of Japan’s hawkish turn, along with key interventions in the exchange rate policy. Understanding these factors is crucial for grasping the current forex market trends.

Fed Rate Cut Expectations Rise, Dollar Faces Broad Pressure

Weak signals from the U.S. labor market have surprised the market. Latest data show that core PPI growth was below expectations, opening up room for the Fed to cut rates further. Officials like Waller and Williams have signaled dovish stances, rapidly boosting market expectations for easing monetary policy.

According to data from the CME FedWatch Tool, the market now prices in an 87.6% chance of a rate cut in December, compared to just a 12.4% chance of no cut. This indicates unprecedented confidence in the Fed’s easing.

As a result, the dollar index has come under significant pressure, falling 0.72% last week. Meanwhile, EUR/USD rose 0.71%, with ING predicting the pair could briefly break above 1.17. If geopolitical risks further diminish and U.S. economic data remain weak, the euro could reach 1.18 before year-end.

Bank of Japan Signals Rate Hike, Yen Appreciation Confirmed

In stark contrast to the Fed’s easing bias, the BOJ’s policy shift has become the most decisive factor behind the yen’s appreciation. BOJ Governor Ueda Kazuo explicitly stated on December 1 that the bank will carefully consider the pros and cons of a rate hike in December and make an appropriate decision. This is the clearest hawkish signal so far.

Swap market data shows that expectations for the BOJ to raise rates at the December 19 meeting have surged to 62%, doubling from 30% two weeks ago. This sharp rise in expectations has directly driven the yen higher.

Japanese Prime Minister Suga Sanae further reinforced market confidence, stating that the government will closely monitor exchange rate fluctuations and be ready to take “necessary” actions in the forex market. These comments have heightened market concerns about potential intervention and indirectly reflect policy focus on yen appreciation.

Nomura Securities analysts note that as December Fed rate cut expectations intensify alongside strengthening BOJ rate hike expectations, the previous consolidation pattern of USD/JPY is being broken. The yen’s trend is facing a major turning point, which is at the core of its appreciation.

Technical Breakthroughs, Yen’s Reversal Gains Momentum

From a technical perspective, the support for the yen’s appreciation remains solid. USD/JPY is approaching the 21-day moving average; a decisive break below this level could open the door to further declines. Key support levels are around 154 and 153.

Similarly, EUR/USD is forming a “W” bottom pattern, with RSI indicating strong bullish momentum. A break above 1.1656 would further expand the upside potential. Conversely, support levels are at 1.155 and 1.149.

Key market focus now includes subsequent statements from Japanese officials, U.S. economic data, and developments in Russia-Ukraine peace talks. If expectations for BOJ rate hikes further strengthen, USD/JPY could continue to decline, confirming the yen’s appreciation in both magnitude and persistence. Conversely, if negotiations falter or inflation data exceed expectations, the yen’s rally could be restrained.

Overall, the yen’s appreciation results from multiple factors working together: the Fed’s easing stance weakening the dollar foundation, the BOJ’s hawkish shift providing solid support, and technical breakthroughs confirming the sustainability of this trend.