USD/JPY falls below 155! Carry trade stop-loss wave triggers a rebound in the Japanese yen, with central bank rate hike expectations acting as the catalyst

The Bank of Japan’s rate hike expectations suddenly heated up, triggering a market upheaval. Overnight index swap data shows that the probability of a rate hike in December has surpassed the critical 80% level—driven by recent hawkish statements from Bank of Japan Governor Ueda Kazuo.

But what truly stirs the market is not just the rate hike expectations themselves. The Fed’s bets on a December rate cut have recently risen to 90%, indicating that the US-Japan interest rate differential is narrowing rapidly. When the policy directions of the two countries move in opposite directions, the USD/JPY carry trade (borrowing in yen to buy USD assets) suddenly becomes dysfunctional.

Carry trade unwinding has already begun

On December 1, USD/JPY fell to 154.66, hitting a two-week low. More importantly, the yen is challenging the psychological level of 155. Coin Bureau analyst Nic Puckrin pointed out that “the wave of yen carry trade unwinding is once again underway”—this is not baseless speculation but a direct consequence of the narrowing US-Japan interest rate spread.

As carry trade positions start to be stopped out and closed, a self-reinforcing cycle forms: selling USD, buying yen → yen appreciates → more carry traders follow suit and close positions → yen continues to strengthen. Lee Hardman, an analyst at Mitsubishi UFJ Financial Group, predicts that USD/JPY could fall toward the 150 level by early 2026.

Market divergence: Is a rate hike already a certainty or still uncertain?

Regarding whether the Bank of Japan will implement a rate hike in December, market opinions are not uniform. A French Paris Bank economist bluntly stated that Ueda Kazuo’s latest remarks “almost serve as a forecast for a December rate hike.” JPMorgan and Barclays have also moved up their timing, pushing the rate hike from January next year to December.

However, Goldman Sachs holds a different view. The firm believes the Bank of Japan may still be waiting for more corporate wage data, with January next year being the more probable window.

Dual drivers of yen appreciation

The current yen rally is driven both by the “push” of carry trade unwinding and the “pull” of rate hike expectations. The combination of these forces puts significant downward pressure on USD/JPY. In the short term, whether the 55 technical level can hold will determine if the carry trade unwinding accelerates further.