Hawkish Fed + dovish Bank of Japan = Yen depreciation?
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The policy divergence between the Federal Reserve and the Bank of Japan is strongly stirring up the foreign exchange market, with the yen bearing the brunt.
On November 3, according to Zhui Feng Trading Desk, J.P. Morgan stated in its latest research report that the Fed unexpectedly adopted a hawkish stance in its October meeting, casting doubt on a December rate cut, while the Bank of Japan maintained its dovish position, rejecting the market’s expected rate hike. This stark contrast directly led to a sharp weakening of the yen.
The report points out that the hawkish comments by Fed Chairman Powell after the October FOMC meeting caught the market off guard, and his cautious attitude toward a December rate cut has reignited expectations for a strong dollar. Meanwhile, the Bank of Japan kept its rate unchanged at its closely watched October monetary policy meeting, against the market expectation of a 25 basis point hike, and Governor Ueda's subsequent press conference further signaled a dovish stance.
This policy divergence directly pushed the USD/JPY to quickly break through 153 from near 152.20 yen, then climb above 154, hitting a new high since mid-February. Influenced by the policy divergence of the two major central banks, J.P. Morgan raised its forecast for USD/JPY, expecting it to reach 156 in the fourth quarter of 2025, much higher than the previous 142.
(USD/JPY daily candlestick chart)
The report states that the current exchange rate trend reflects the continued impact of “Takaichi trades”, a portfolio strategy of buying Japanese stocks and selling the yen. According to a model based on the TOPIX index and the probability of a December Bank of Japan rate hike, the fair value of USD/JPY is around 154, meaning there is still upside risk in the short term. However, when USD/JPY is well above the 155 level, the risk of Japanese authorities intervening increases sharply, which could become a “ceiling” for further currency appreciation.
Fed’s Unexpected Hawkishness, Dollar Outlook Clouded
J.P. Morgan notes that Fed Chair Powell made remarks at the October FOMC press conference that were “far from dovish,” shaking the market’s consensus expectation of a December rate cut.
This reflects emerging internal tensions between the dual mandates of employment and inflation earlier than consensus and J.P. Morgan had expected, especially with nominal growth remaining at a healthy level of about 5%.
Judging from the OIS curve response, the market mainly lowered its expectations for rate cuts in December and January, but made limited adjustments for meetings after 2026.
(Powell’s unexpectedly hawkish stance at the October FOMC meeting led the market to sharply lower its rate cut expectations for December 2025 and January 2026, but had little impact on the rest of the OIS forward curve.)
J.P. Morgan believes that this asymmetric reaction shows the market doubts the durability of the Fed’s hawkish pivot, especially considering the Fed’s longstanding asymmetric dovish bias, the possibility of negative nonfarm payroll numbers after the government shutdown, and the risk of renewed concerns over the Fed's independence early next year.
The market generally believes that once there are signs of a weakening labor market, the hawkish tone will be hard to sustain, which limits further upside for the dollar.
It is worth noting that J.P. Morgan emphasized that although USD/JPY surged due to policy divergence, the exchange rate has begun to “overshoot” and is approaching a sensitive area that could trigger intervention. These factors together are making the short-term USD outlook “even more uncertain,” limiting the conditions for a sustained dollar bull trend.
Bank of Japan Remains “Dovish”, Yen Forecasts Forced Sharply Higher
The report notes that contrary to market consensus, the Bank of Japan decided at its closely watched October monetary policy meeting to keep its policy rate unchanged at 0.50%, and did not hike rates by 25 basis points as previously expected by J.P. Morgan. The post-meeting Outlook Report also made no changes to economic growth and inflation forecasts.
Bank of Japan Governor Kazuo Ueda continued the dovish tone at the subsequent press conference, which triggered widespread yen selling. The USD/JPY rate surged from around 152.20 before the meeting, successively breaking through 153 and 154.
J.P. Morgan economists believe the Bank of Japan’s decision reflects its respect for the “Takaichi government’s” preference for policies of reflation and yen depreciation. Based on this, J.P. Morgan believes the next rate hike by the Bank of Japan may be postponed to January next year, and has thus sharply raised its USD/JPY exchange rate targets:
Q4 2025: 156 (previously 142)
Q1 2026: 152 (previously 139)
Q2 2026: 151 (previously 139)
Q3 2026: 150 (previously 139)
“Takaichi Trades” Dominate the Market, But Intervention Risks Are Rising
The report points out that the recent USD/JPY trend can no longer be explained simply by the US-Japan interest rate differential.
J.P. Morgan believes that market dynamics are now dominated by the so-called “Takaichi trades”—that is, the trade pattern of buying Japanese stocks and selling yen, caused by cooled expectations of an early rate hike by the Bank of Japan.
J.P. Morgan points out that a model based on the TOPIX index and December rate hike probability shows fair value for USD/JPY around 154.5. As long as “Takaichi trades” continue and the Bank of Japan stands pat, the short-term risk for USD/JPY remains tilted to the upside.
However, the report also states that the upside is not unlimited. J.P. Morgan stresses that when the exchange rate is “well above 155,” the risk of policy intervention will increase significantly.
Japan’s new Finance Minister Katayama has issued a warning that he is “monitoring foreign exchange market movements with a high sense of urgency,” which is seen as an initial signal for intervention. Verbal or actual intervention from the Japanese Ministry of Finance, a hawkish shift by the Bank of Japan, or pressure from the United States could all limit further appreciation of the exchange rate.
Looking ahead, J.P. Morgan expects that after the Bank of Japan’s next rate hike in January next year, USD/JPY will gradually return to a downward trend.
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The above highlights are from Zhui Feng Trading Desk.
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