JP Morgan: Interest Rate Outlook No Longer Supports Yen The Japanese yen has been strengthening steadily since late November on expectations of a Bank of Japan (BoJ) interest rate hike, but the rally has slowed recently. The USD/JPY pair stalled just above the psychological 155.00 level, and the GBP/JPY pair was stuck at the 207.00 level in trading on Friday (December 5, 2025), while the EUR/JPY pair has been confined to the 180.00-182.00 range for the past two weeks. Some experts believe the interest rate outlook is unlikely to drive further yen appreciation.
In a recent study, JP Morgan explained that the relatively subdued market reaction to the recent hawkish stance from BoJ officials reflects a structural shift in the yens driving forces. This suggests the influence of domestic interest rate changes has diminished compared to previous policy cycles. Last year, many analysts predicted that long positions in the yen would be quite promising, as rising interest rates would boost its exchange rate. However, according to JP Morgan, the BoJ has shown little enthusiasm for driving such yen appreciation. JP Morgan believes the BoJs interest rate normalization is largely symbolic. The BoJ isnt truly attempting to close the interest rate gap between Japan and other major economies. As a result, the BoJs rate hikes have only temporarily strengthened the yen, before weakening again. The BoJs approach to rate hikes has been deemed overly cautious, failing to significantly change Japans overall policy bias. The yen continues to be a prime target for carry traders to sell against other currencies offering higher yields. "The yens sensitivity to domestic short-term interest rate cycles has declined sharply over 2024," said JP Morgan. "USD/JPY has become structurally more sensitive to external developments than to domestic ones." Analysts at JP Morgan believe the yen is increasingly sensitive to global risk sentiment rather than changes in the Bank of Japans monetary policy. This trend is unlikely to change even if the Bank of Japan raises interest rates again this month, as Japanese bond yields remain very low compared to international standards.
