Market speculation is growing that the Bank of Japan (BOJ) may raise interest rates this month, yet traders continue betting on further weakness in the yen against the U.S. dollar. Analysts from Bank of America, Nomura Holdings, and RBC Capital Markets note that investor positioning reflects such bearish bets. Citi's "Pain Index" for the yen remains well below zero, signaling persistent pessimism toward the currency.
Even after BOJ Governor Kazuo Ueda hinted at a potential near-term rate hike—with reports suggesting the central bank is prepared to act in December barring major economic or financial shocks—investors have held onto their short positions. The rationale is that even if the BOJ tightens policy, Japanese yields are expected to remain significantly lower than U.S. rates, supporting dollar strength.
"Positioning still favors a gradual rise in USD/JPY into year-end, and unless the BOJ delivers a genuine surprise, this trend will be hard to reverse," said Ivan Stamenov, head of G-10 FX trading for Asia-Pacific at Bank of America in Hong Kong. He noted that while Ueda’s hawkish remarks sparked discussions, market sentiment has not shifted materially.
A weaker yen could have significant implications, driving up import costs and exacerbating already elevated inflation. It may also complicate Prime Minister Sanae Takaichi’s plans to ease household cost-of-living pressures. Finance Minister Satsuki Katayama has attempted to curb the yen’s decline with limited success, as delayed BOJ policy normalization continues to weigh on the currency.
Despite modest gains following Ueda’s clearest signal yet of an impending hike, the yen remains under pressure. Sagar Sambrani, senior FX options trader at Nomura, observed that positioning reflects investor expectations of a dovish BOJ stance over the medium term, even as inflation stays well above the central bank’s target. Hedge funds have trimmed bullish USD/JPY bets post-Ueda’s comments, but "most remain positioned for upside," he added.
Rob Turner, director of electronic FX trading at RBC Capital Markets, noted "speculative positioning" still leans toward USD/JPY strength, though some unwinding has occurred since late November. Options markets echo this trend—data from CME Group shows USD/JPY call volume (profiting from yen weakness) outpaced puts by about 40% the day after Ueda’s remarks.
Upcoming Japanese wage data on Monday may offer clues on whether income growth supports a December BOJ hike. Swaps now price in a 91% chance of a 25-bps hike, up from 58% in late November. Despite heightened rate expectations, consensus favors yen weakness. UBS revised its year-end USD/JPY forecast to 158 from 152, while Bank of America predicts the yen will breach 160 by early 2026. On Friday, USD/JPY settled at 155.33.
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