The Bank of Japan's rate hike is imminent, and the exchange rate market is already waiting for the starting gun.

December 19th, the Bank of Japan is about to announce its interest rate decision, with the market widely expecting a hike to 0.75%, reaching a 30-year high. But can this move trigger a rally in the forex market? Several institutions have given vastly different answers.

The Battle Between Two Major Forecast Camps

Bank of America depicts a relatively moderate scenario: if the Bank of Japan adopts a “dovish rate hike” stance, the USD/JPY will continue to rise, potentially hitting 160 early next year. Regarding the annual target, BofA predicts that USD/JPY will gradually fall from 160 in Q1 2026 to 155 in Q4.

Nomura Securities, on the other hand, is more bold. The firm believes that yen depreciation is causing political backlash within Japan, and the narrowing of the US-Japan interest rate differential will weaken carry trade attractiveness. Nomura forecasts that USD/JPY will rebound more quickly, falling from 155 in Q1 2026 to 140 by Q4.

This divergence reflects different interpretations of the “central bank’s true intentions”—whether to steadily exit easing or to tighten aggressively.

Why Haven’t Rate Hike Expectations Exploded?

The seemingly significant rate hike decision has elicited a calm market response because the expectations have already been priced in. Investors and institutions are well aware that this rate hike is coming, so when the decision is announced, there’s little room for surprises.

More importantly, Japan is implementing large-scale fiscal stimulus, which is enough to suppress yen appreciation pressure. In other words, the central bank is tightening while the government is easing, and these opposing forces offset each other.

The Life and Death of Carry Trades

The most direct impact of Japan’s rate hike comes from the unwinding of carry trades. The logic is simple: borrow low-interest yen to invest in high-yield US stocks, emerging markets, or even Bitcoin. When Japanese interest rates rise, this arbitrage space shrinks, forcing many positions to be liquidated.

The market in July 2024 is a clear example—when the BOJ unexpectedly raised rates to 0.25%, it triggered a collapse of carry trades, causing the yen to surge and US stocks and Bitcoin to plunge simultaneously.

However, most analysts believe this shock should be relatively mild this time. On one hand, expectations are already priced in; on the other hand, policy measures have been adjusted accordingly.

The Big Game of Exchange Rates in Emerging Markets

While focusing on USD/JPY, the exchange rates of the RMB against the Philippine Peso and other emerging market currencies are also quietly changing. This reflects the subtle flow of global funds across different markets—when the carry trade sentiment shifts, not only US stocks and Bitcoin will be affected, but the entire capital structure of emerging markets will be reshuffled.

The 2026 Exchange Rate Map

The long-term forecasts for USD/JPY from the two major institutions diverge significantly, but both agree on one point: the long-term trend of yen appreciation is hard to reverse. BofA sees a range of 150-160, while Nomura sees 140-155.

This means that the stream of rate hikes by the Bank of Japan will eventually merge into the great river of the global exchange rate system. For investors relying on carry trades and traders watching RMB, Peso, and other emerging market currencies, every upcoming move could rewrite the map of capital flows.

The market is waiting; on December 19th, the Bank of Japan’s decision will speak.