The Japanese yen still has room for interest rate hikes in 2026, pay attention to unwinding carry trades. Li Shengyang: It may be a good time for currency exchange

The Bank of Japan announced last Friday (19th) that it would raise the policy interest rate from 0.5% to 0.75%, marking the first rate hike since January this year and the highest level in nearly 30 years. Although 0.75% still sounds extremely low, it represents a significant adjustment compared to before, with a percentage increase of 50%. This decision was unanimously approved by all committee members, reflecting the central bank's ongoing concern about inflation. Inflation Pressure Not Fully Eased The main reason behind the rate hike is that inflation pressure in Japan has not fully eased, with the core CPI recently maintaining around 3%, above the central bank's target of 2%. Although the increase in food prices has moderated, the overall rise in prices has become a structural phenomenon. Bank of Japan Governor Kazuo Ueda stated at a post-meeting press conference that a positive feedback loop between wages and prices is gradually forming, and he expects to continue adjusting policies based on economic data, suggesting that there may be further room for rate hikes in 2026. Japan's economic performance shows mixed signals. In the third quarter, GDP contracted at an annualized rate of about 2.3%, mainly affected by declining exports and weak residential investment, partly attributed to the impact of U.S. tariff policies. However, the latest data shows signs of recovery: November exports increased by 6.1% year-on-year, far exceeding expectations, with exports to the U.S. rebounding for the first time in eight months, significantly contributed by shipments of automobiles and pharmaceuticals. This has led the market to believe that GDP in the fourth quarter is likely to turn positive, avoiding consecutive contractions. High-Level Wage Increases Expected For Hong Kong residents, prices in Japan remain relatively cheap due to the weak yen, but local residents have felt a significant increase, especially in the food and energy sectors. In terms of wages, nominal wages grew by 2.6% in October, but real wages, after adjusting for inflation, have experienced negative growth for ten consecutive months, with a similar situation in November. Nevertheless, corporate surveys indicate that high-level wage increases are expected in the spring labor negotiations of 2026, supported by a tight labor market that also boosts nominal wage growth. Another focus is the potential impact of the yen carry trade. For many years, investors have borrowed low-interest yen to invest in high-yield assets, such as U.S. stocks or cryptocurrencies, on a large scale. Although this rate hike did not trigger a severe unwinding, the yen weakened after the announcement, with the dollar rising to around 157 yen, interpreted by the market as the central bank's signals being less hawkish than expected. Analysts point out that if the pace of rate hikes accelerates in the future, combined with the possibility of continued rate cuts in the U.S., the profit margins for carry trades will be further compressed, potentially leading to some unwinding and affecting global risk assets. Limited Further Depreciation Space for the Yen Overall, while Japan's economy faces uncertainties in exports and pressures on real wages, recent improvements in domestic demand and exports provide the central bank with room to continue normalizing policies. For friends planning to travel to Japan, the current weak yen exchange rate may be a good time to exchange currency, but future fluctuations should be noted. If the trends of U.S. rate cuts and Japanese rate hikes continue, the further depreciation space for the yen will be limited, with increasing potential for a rebound. Additionally, it is worth mentioning that the yield on Japan's 10-year government bonds broke through 2% after the rate hike, reaching a 26-year high. This not only reflects changes in market inflation expectations but may also exacerbate fiscal pressures, as Japan's public debt is substantial, and global investors are closely monitoring whether this will trigger a broader adjustment in the bond market Li Shengyang Related articles: Stock and property predictions emerge at the end of the year, analyzing why the outlook is optimistic. Li Shengyang: Action is everything