Kazuo Ueda on December 19 may trigger a global capital shift, with USD/JPY and USD/PHP awaiting a turning point

The Bank of Japan’s rate hike decision is about to be announced, which not only concerns the yen exchange rate but could also reshape the global capital landscape of carry trade.

The rate hike has already been “priced in”; the key is the subsequent attitude

On December 19, BOJ Governor Kazuo Ueda will announce the latest interest rate decision. The mainstream market view is that rates will rise by 25 basis points to 0.75%, hitting a 30-year high.

However, this rate hike itself has already been fully digested by the market. What are market participants truly paying attention to? It’s Ueda’s signals regarding the future pace of rate hikes.

According to analyses from multiple institutions, the BOJ may raise the lower bound of its neutral rate estimate (from the current 1.0%). Based on current market pricing, rates are expected to rise to 1.0% by September 2026.

Nomura Securities remains cautious, believing that the market’s optimistic sentiment may be overdone.

Carry trade unwinding triggers a chain reaction

Why are so many people paying attention to Japan’s rate hike? Because it directly impacts the life and death of carry trades.

In recent years, carry traders have borrowed yen at low interest rates to invest in high-risk assets like US stocks and Bitcoin to earn the spread. Once the BOJ raises rates, borrowing costs increase, making these trades unprofitable.

The lessons of history are still fresh—at the end of July 2024, the BOJ suddenly raised rates to 0.25%, directly triggering a wave of carry trade unwinding, leading to yen appreciation, a sharp decline in US stocks, and a plunge in Bitcoin.

However, this time the impact should be much milder. On one hand, this rate hike has already been a market consensus; on the other hand, large-scale fiscal stimulus by the Japanese government continues to suppress yen appreciation.

Divergence among institutions: “Dovish” vs “Hawkish” exchange rate games

Regarding the future trend of USD/JPY, predictions from major institutions are inconsistent.

Bank of America provides a more moderate scenario. If the BOJ adopts a “dovish rate hike” (signaling easing), USD/JPY could stay high or even surge to 160 in early next year. If it adopts a “hawkish rate hike” (signaling tightening), yen shorts may be stopped out and USD/JPY could retreat to around 150—though Bank of America considers this less likely.

Bank of America’s quarterly targets for USD/JPY in 2026 are: Q1 at 160, Q2 at 158, Q3 at 156, Q4 at 155.

Nomura Securities has a more aggressive view. The firm points out that yen depreciation has already triggered political pressure domestically, and the narrowing US-Japan interest rate differential will reduce the attractiveness of carry trades, gradually strengthening the yen’s appreciation trend. They forecast USD/JPY will decline from 155 in Q1 to 140 by Q4 2026.

This divergence essentially reflects differing expectations about the “speed of yen appreciation after rate hikes.”

Ripple effects on emerging market currencies

It’s worth noting that the BOJ’s actions not only impact USD/JPY. As yen appreciation expectations heat up and the dollar strengthens, pressure will also mount on emerging market currencies like the Philippine peso, triggering cross-border capital reallocation. Carry trade funds may not only withdraw from the yen lending market but also from high-yield assets in Southeast Asia and other emerging markets.

A major move is imminent; the key depends on Ueda’s words

Overall, this rate hike decision may not be as shocking as market expectations suggest. But Ueda’s wording—whether leaning conservative or aggressive—will become the trigger for global capital rebalancing. If the BOJ adopts a hawkish stance, a chain reaction of carry trade unwinding, yen appreciation, US stock pressure, and capital outflows from emerging markets could unfold simultaneously.

On December 19, the answer will be revealed.