BoJ preview: Interest rate hike baked in, what’s next for the JPY (further appreciation)?

[Ben Graham]

Key elements

BoJ hike is fully priced, normalization to continue: Markets assign a ~94% probability to a 25bp BoJ hike to 0.75%, backed by firm wage growth, improving consumer confidence, and strong Tankan sentiment—pointing to further gradual tightening into 2026.

Policy divergence favours JPY structurally: A December hike would underscore the BoJ as the lone major central bank tightening while the Fed eases, reinforcing medium-term appreciation bias for the yen.

USD/JPY near-term bias turns bearish: Technicals signal fading upside momentum; below 156.10, risks skew toward a pullback toward 154.40 and lower, with rallies vulnerable unless resistance is decisively cleared.

The short-term overnight interest rate swap market in Japan has already priced in a high chance of 94% chance that the Bank of Japan (BoJ) will hike for the second time this year (within its current gradual normalization monetary policy stance) by 25 basis points this Friday, 19 December to bring the overnight policy rate to 0.75%, the highest level in 30 years.

A move on Friday would cement the BOJ’s status as the only major central bank raising rates this year. It would also mark the first instance since the BOJ adopted its two-day meeting format in 1998 that it and the Federal Reserve move policy rates in opposite directions within the same month.

Rising wages, consumer confidence, and Tankan business sentiment

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Fig. 1: Key Japan economic data that BoJ watches as of 15 Dec 2025 (Source: MacroMicro)

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Fig. 2: Japan overnight indexed swap rates as of 16 Dec 2025 (Source: MacroMicro)

On top of BoJ Governor Ueda’s recent hawkish remarks on the justification to maintain the BoJ’s stance of gradual interest rate rises, several key economic data points other than the core-core CPI trend (excluding fresh food and energy) that the BoJ monitors have flashed out “all clear” signs to enact another rate hike after an 11-month pause since January’s hike.

The latest Q4 Tankan business sentiment survey for large manufacturing companies operating in Japan has risen to almost a 3-year high at 15.0. The mood of Japanese consumers has also improved since April 2025, when consumer sentiment rose to a 19-month high of 37.50 in November 2025 (see Fig. 1).

In addition, the latest BoJ’s report on wages published on Monday, 15 December 2025, has indicated that a firm wage growth momentum is likely to continue into the new fiscal year of 2026 at the same average growth rate of 5.25% in fiscal year 2025 as secured by Rengo, the largest trade union confederation in Japan.

Hence, the BoJ is likely to continue its gradual interest rate hike cycle into 2026, as priced in by the interest rate swap market. The 1-year overnight-indexed swap rate has increased to 0.84% as of 16 December 2025 (see Fig. 2).

Let’s now uncover the potential short-term directional movement of the USD/JPY from a technical analysis perspective.

Preferred trend bias (1-3 days) of USD/JPY – Bearish below 156.10

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Fig. 3: USD/JPY minor trend as of 17 Dec 2025 (Source: TradingView)

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Fig. 4: USD/JPY medium-term & major trends as of 17 Dec 2025 (Source: TradingView)

The USD/JPY has continued to oscillate within a minor descending channel that has been in place since reaching a 10-month high of 157.90 on 20 November 2025.

Bearish bias below 156.10 key short-term pivotal resistance, and a break below 154.40 near-term support resumes the minor bearish impulsive down move sequence to expose the next intermediate supports at 153.70 and 152.95 (see Fig. 3).

Key elements

• The daily MACD trend indicator of the USD/JPY has staged a bearish breakdown below a key ascending support on 4 December 2025 and is trending downwards steadily towards its centre line (see Fig. 4).
• These observations from the daily MACD trend indicator suggest the multi-month up move of the USD/JPY from April 2025 low to November 2025 high is at a rising risk of a trend change towards a bearish bias (see Fig. 4).
• The hourly RSI on USD/JPY is rapidly approaching overbought territory (above 70), signalling that the rebound seen during the Asia session on Wednesday, 17 December 2025, is likely to lose bullish momentum in the near term (see Fig. 3).

Alternative trend bias (1 to 3 days)

A clearance above 156.10 invalidates the bearish bias on the USD/JPY to see a further potential squeeze up to retest the next intermediate resistances at 156.60 and 157.00/157.15.

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