📝 Entering Christmas Week: The Yen Weakness Trend at a Final Crossroads
— Will It Break Down, or Will It Accelerate Further? —
■ Market Overview: Holiday Mode Takes Hold — Liquidity Becomes the Key Driver
This week marks the start of the year-end holiday period in Western markets:
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Dec 24: Christmas Eve
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Dec 25: Christmas Day
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Dec 26: Boxing Day
As a result, European and U.S. markets will gradually shift into full holiday mode toward the latter half of the week.
Many overseas participants have already begun reducing positions, and once the Tokyo/Asia session runs its course, liquidity is likely to drop sharply.
In this environment, the central theme is simple:
“Can the yen-weakening trend that has persisted since the second half of the year survive in thin trading conditions?”
Rather than predicting direction outright, this week is about assessing whether the trend:
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holds firm, or
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becomes vulnerable to a sudden acceleration or breakdown.
■ Yen Outlook: Even After a Rate Hike, the Yen Failed to Attract Buyers
At last week’s Bank of Japan policy meeting, the BOJ raised its policy rate by 25bp to 0.75%.
Under normal circumstances, this would have been a textbook setup for:
“Narrowing U.S.–Japan rate differentials → yen buying.”
Instead, the market reaction was the exact opposite:
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The yen failed to strengthen even after the rate hike
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Verbal intervention from the government had little lasting effect
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Yen weakness accelerated further
What the market appears to be focusing on is fiscal risk rather than monetary policy, including:
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Concerns over expansionary fiscal policy under the Takaichi administration
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Rising yields accompanied by selling pressure in Japanese government bonds
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Growing unease about Japan’s fiscal sustainability
That said, Japanese equities have remained resilient, benefiting from a weaker yen, and this has not evolved into a broad-based “Japan selloff.”
As a result, one fact stands out clearly in the market psyche:
“Even after the BOJ meeting, the yen did not strengthen.”
This has reinforced confidence in yen carry trades, with many participants concluding that carry remains effective.
In absolute terms, the U.S.–Japan interest rate differential remains wide, and the prevailing view is that:
“The carry trade is still viable.”
■ BOJ Outlook: Neutral Rates Remain a Distant Target
Early this week, comments from former BOJ Policy Board member Sakurai drew market attention.
Key takeaways included:
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The BOJ’s next policy target is 1.50%
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The next hike to 1.00% is most likely around June–July 2026
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The neutral rate is estimated at around 1.75%
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Even at 1.50%, policy would remain below neutral
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If the U.S. economy holds up and domestic inflation stays above 2%:
→ Two additional hikes could be possible in the following year -
If uncertainty increases:
→ Rate hikes may be limited to one, with further moves pushed into 2027
In short, the BOJ’s stance can be summarized as:
“We will hike — but we will not rush.”
There is also a growing view that Governor Ueda’s deliberately cautious and ambiguous messaging reflects sensitivity to the political backdrop under the Takaichi administration.
As a result, the market still finds little reason to actively buy the yen.
■ Dollar Outlook: Mild Consolidation, Not a Trend Reversal
In early London trading, the U.S. dollar index has seen only a modest pullback from last week’s gentle dollar strength.
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Tokyo morning high: 98.728
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Early London low: 98.481
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Dollar Index: 98.53 (-0.07%)
True to the Christmas-week pattern, fresh catalysts are scarce, and price action is largely driven by position adjustment.
This is less about the dollar breaking down, and more about:
“A lack of urgency to add new dollar longs.”
■ Key Points for the Week Ahead (Bottom Line)
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Can the yen-weakening trend persist even in thin liquidity?
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Are there early signs of carry trade unwinds?
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Heightened sensitivity to geopolitical risks and official remarks
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In low-liquidity conditions, markets are driven more by
positioning imbalances than by the strength of fundamentals
This is a year-end market that looks calm on the surface but is prone to sudden swings.
Rather than chasing direction, this week will test traders’ ability to withstand abrupt volatility.
