Yen Jumps as BOJ Signals Rate Hike, Dollar Softens

On 1 December, the forex market opened to a rare double shock: a firmer Japanese yen and a softer U.S. dollar. The yen strengthened around 0.5% to roughly ¥155.4 per dollar after Bank of Japan Governor Kazuo Ueda signaled that a rate hike is firmly on the table for the 18–19 December policy meeting, pushing the probability of a move up to about 80%. At the same time, traders are heavily pricing in a 25-basis-point Federal Reserve rate cut this month, leaving the dollar index drifting after a 0.7% weekly decline.

Shifting Policy Tides: From Ultra-Easy BOJ to Dovish Fed

The underlying drivers of this FX repricing are firmly rooted in central bank signaling.

In Japan, Ueda’s remarks in Nagoya marked the clearest hint so far that the BOJ is ready to normalize further after exiting its decade-long ultra-loose regime earlier this year. He highlighted ongoing wage gains and a recovering economy as conditions that could justify another rate increase from the current 0.5% policy rate, noting that timely moves are needed to avoid a resurgence in inflation.

On the U.S. side, markets have swung decisively toward expecting a December cut. After softer retail sales and producer price data, some estimates put the probability of a 25 bps move above 80%, with several Fed officials — notably Governor Christopher Waller — openly arguing for an initial cut followed by a meeting-by-meeting approach in 2026.

The result is a narrowing yield differential between U.S. and Japanese assets at the margin, which has historically been one of the main supports for USD/JPY carry trades. As Dr. Maria Lindholm, chief FX strategist at “Orion Capital,” puts it:

“For the first time in years, both ends of the USD/JPY rate spread are moving in opposite directions — the Fed is edging toward cuts while the BOJ is inching toward hikes. That fundamentally challenges the idea of the yen as a one-way funding currency.”

FX Desks React: Yen Leads While Dollar Loses Its Aura

The immediate market reaction has been textbook “policy convergence” FX behavior.

• The yen firmed about 0.5% on the day, extending gains from earlier in the week as Japanese bond yields touched their highest levels since 2008.
• The U.S. dollar index (DXY) is holding near recent lows after a 0.5–0.7% weekly drop, its sharpest decline since mid-year, as traders rotate out of the greenback amid rising rate-cut expectations.
• Euro and sterling have edged higher, while Asia FX — including the Korean won and Singapore dollar — is trading in narrow but firmer ranges, supported by the prospect of easier U.S. policy.

The reaction is not uniform. In India, for example, the rupee remains under pressure near record lows around 89.45 per dollar, with markets focused on a potential 25 bps cut from the Reserve Bank of India on 5 December following earlier easing this year.

In options markets, traders are paying more for yen calls (betting on further JPY strength) relative to puts, and risk reversals in major pairs such as USD/JPY and EUR/JPY are tilting away from the long-standing bias toward a weaker yen. That suggests positioning is starting to adjust to a new regime where BOJ policy can no longer be assumed to stay static.

Beyond the Headlines: What the New Macro Mix Means for 2026 FX

Looking ahead, the combination of a cautious Fed and a gradually less-dovish BOJ could reshape core FX trends going into 2026.

First, a structural repricing of USD/JPY becomes a realistic theme. If the BOJ delivers a December rate hike and signals a path toward 0.75% or above — as Ueda hinted — while the Fed begins easing, the rate gap that fueled years of yen-funded carry trades should narrow. That increases the risk of carry reversals if volatility spikes.

Second, a gentler U.S. dollar supports a rotation into higher-yielding and commodity-linked currencies, particularly in Asia-Pacific, where Australia and New Zealand have their own domestic triggers.

Third, the broader cross-asset context matters. Recent global fund-flow data show investors taking profit in U.S. and European equities while adding to gold and short-duration bonds, signaling a cautious stance on risk and a preference for hedges.That backdrop typically favors:

• Currencies of surplus countries and commodity exporters;
• Safe-haven assets such as the yen and Swiss franc when volatility spikes.

Oliver Hayes, macro strategist at “Summit Ridge Research,” sums it up:

“If the Fed really does cut in December while the BOJ hikes, we could be witnessing the early stages of a regime shift. The dollar bull cycle is already wobbling, and a more assertive BOJ would add another layer of pressure.”

For FX traders, the key watchpoints now are: BOJ communications into the December meeting, U.S. labor data on 16 December, and how quickly positioning in USD/JPY and Asian FX realigns with the new policy narrative.