Bank of America analysts expect structural yen-selling flows to continue driving the disconnect between interest rate differentials and USD/JPY performance, according to a research note published Wednesday.
The bank’s December 3 report, “FX Viewpoint: JPY in 2026 – bearish bias with policy challenges,” highlights that despite markets pricing in both a Federal Reserve rate cut at the December FOMC meeting and a Bank of Japan rate hike, the foreign exchange market reaction has remained muted.
Bank of America outlines three potential Bank of Japan scenarios and their likely impact on the yen. A dovish rate hike could leave USD/JPY elevated and potentially push the pair toward 160 early next year, while a decision to hold rates might trigger a swift break above 160, potentially forcing the Ministry of Finance to consider intervention before year-end.
The third scenario envisions a hawkish rate hike sparking short-covering in the Japanese currency, which could drive USD/JPY toward 150 heading into the new year. However, the bank notes that recent signs of BoJ hawkishness appear driven more by yen weakness than by domestic economic fundamentals.
Bank of America concludes that the threshold for a genuinely hawkish hike remains high, suggesting that risks of further yen depreciation continue to dominate the outlook for the Japanese currency.