2025-12-26 10:22:02

The Bank of Japan's most aggressive rate hike in thirty years just settled, with the policy rate pushed up to 0.75%. As a result, the yen has become increasingly weak, now sliding around 156, just a breath away from the annual low. Wall Street is quite bearish on this, with many institutions predicting the USD/JPY will break through 165 by 2026. How did this depreciation storm become so fierce?

The root of the problem lies in one word: mismatch. The Bank of Japan wants to take it slow, and the market is betting that the next rate hike won't come until September 2026. However, inflation has exceeded the 2% target for 44 consecutive months, yet real interest rates remain in negative territory and refuse to rise. In contrast, the Federal Reserve's rate-cut cycle is nearing its end, with hawkish officials clearly stating that "interest rates will remain unchanged for the next few months." The interest rate differential between the US and Japan remains firmly at around 2.2%, fueling the yen's continued depreciation.

Capital outflows hit even harder. Japanese retail investors are holding onto a record 9.4 trillion yen in overseas stocks, and corporate cross-border mergers and acquisitions have hit new highs—all moving money abroad. The old trick of arbitrage trading is making a comeback—borrowing cheap yen to invest in high-yield currencies. Leverage funds' short positions have risen to their highest since July 2024, making a yen rebound nearly impossible.

How do institutions forecast? JPMorgan sees the 164 level as a key point, Fukuoka Financial Group even thinks it could reach 165, and BNP Paribas warns that 160 is already dangerous. Even more concerning, the Japanese government is injecting 18.3 trillion yen into the economy to stimulate growth, while the central bank is tightening policy. These opposing measures cancel each other out, and government bond yields have surged to an 18-year high, further eroding the yen's credibility.

The Fed's stance is also uncertain. Although there is internal debate over rate cuts, the market has already priced in the expectation that "rate cuts are basically over." If hawks gain the upper hand, the yen could face another blow. The Bank of Japan is in a tough spot: aggressive rate hikes risk triggering a recession, but a dovish stance won't reverse the depreciation trend.

Will the yen really break below 165 in 2026? Will the Japanese government intervene in the forex market again? What do you think will be the outcome of this depreciation saga?

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SchrodingerGas

· 5h ago

This is textbook-level policy misalignment, with the central bank and government each blowing their own horns, and of course the market has to look for arbitrage opportunities. Japan's move was a failure in expectations management; by 2026, the 165 level will definitely be broken. Basically, it's a game-theoretic equilibrium of interest rate differential arbitrage: borrowing cheap yen to buy U.S. bonds, with leveraged funds becoming more bearish on the yen, creating a self-reinforcing vicious cycle. The central bank raising interest rates can't save the yen, which is the most ironic part... indicating market distrust. The 18.3 trillion stimulus policy was directly offset by tightening policies; such a tug-of-war operation is something I've only seen on the blockchain. Japan's government intervening in the foreign exchange market? Wake up, the Fed's stance isn't easing, so intervention is pointless.

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ForkThisDAO

· 5h ago

The Bank of Japan's recent moves are truly remarkable. Raising interest rates while the currency depreciates—this logic is completely reversed. The interest rate differential is right there, arbitrage traders are making money while lying in wait. How could the yen possibly rise? 165 is not a dream. The folks at JPMorgan might even need to lower their expectations further. The government is printing money while the central bank tightens policy—aren't they just fighting each other? The record-high government bond yields are actually damaging the yen's credibility. The Bank of Japan is really caught in a deadlock, with no way out on either side. No matter what they do, they can't reverse the overall trend. The Federal Reserve's stance is unclear? The market has already bet heavily that there will be "no rate cuts," and this is the real killer for the yen. Capital flight is so fierce that raising interest rates alone can't hold it back. We have to wait for the government to intervene in the foreign exchange market. Breaking 165 in 2026? I bet it will happen sooner. Leveraged funds' short positions are piled up, and a rebound in the yen is basically hopeless.

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BottomMisser

· 5h ago

The Bank of Japan's recent moves really shot itself in the foot—raising interest rates leading to depreciation, it's outrageous. The policy mismatch is truly painful; the US-Japan interest rate differential is right there, and arbitrage trading is about to take off. Capital outflows combined with leverage shorting, this pace makes it impossible for the yen to turn around. 165 might really be unbreakable; at that point, it will depend on whether the Japanese government intervenes. I bet it will break 165, then Japan will come out to rescue the market again—just the old routine.

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ShortingEnthusiast

· 5h ago

The Bank of Japan is really shooting itself in the foot. Raising interest rates is worse than not raising them at all. Policy mismatch, to put it plainly, is the central bank and the government playing their own tunes. The 165 level will be broken sooner or later. Now we just wait for the Federal Reserve to turn more hawkish and then it will take off directly. Retail investors are疯狂转移 their money into US stocks. This arbitrage trade is back again, and the selling pressure on the yen is unstoppable. The government is spending 18 trillion yen, while the central bank is tightening its stance. Isn't that self-contradictory? No wonder the yen is so sluggish. Intervening in the foreign exchange market can't save it unless the Fed suddenly turns dovish, but given the current situation, that's simply not possible. Shorting the yen now is the most comfortable trade. Who the hell still wants to hold onto this broken thing?

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ProofOfNothing

· 5h ago

The Bank of Japan's move is really brilliant. Raising interest rates but causing depreciation—policy and market are completely out of sync. Wait, the government is printing money while the central bank tightens? Isn't that like hitting yourself on the left hand with the right? If the 165 level breaks, I'll be waiting to see intervention. How long the Japanese government can hold out, who knows. Arbitrage is picking up again. The old trick of borrowing yen is really making a killing. If the Federal Reserve turns hawkish, the yen will be completely finished. Right now, they're just betting on continued dovishness. Honestly, a currency that can't even turn positive in real interest rates, can it stop depreciating? Japan really needs to intervene seriously. If they keep being so soft, foreign capital will start to withdraw.

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