The Japanese yen extended gains against the dollar and euro in thin pre-holiday trading as hedge funds and asset managers boosted bets that the Bank of Japan will resume interest-rate increases as soon as January, according to market participants. The move reflects growing conviction that Japan's central bank will lead major developed-market policy normalization in 2026 while the Federal Reserve and European Central Bank remain on hold, traders say.
Positioning data shows speculative accounts have built the largest bullish yen exposures since mid-2024, strategists note, following recent comments from BoJ board members emphasizing the need to gradually exit accommodative settings. The central bank raised its policy rate twice in 2025, most recently in October, and markets are now pricing roughly 70% odds of another 25-basis-point increase at the January 2026 meeting. "The BoJ is the only game in town for policy momentum," said a senior G-10 currency trader at a major Wall Street bank, requesting anonymity as they aren't authorized to speak publicly. "Every other central bank is stuck in wait-and-see mode."
The yen's momentum contrasts sharply with dollar and euro dynamics heading into year-end. Fed officials have maintained a neutral stance following three rate cuts in late 2025, with inflation metrics hovering near target but growth concerns lingering. Meanwhile, ECB policymakers have paused after an aggressive easing cycle, facing stubbornly weak economic data from Germany and France. This divergence has compressed yield spreads that previously favored dollar and euro carry trades, analysts observe.
Technical momentum indicators suggest the yen's rally may have room to extend, according to currency analysts, with moving average crosses and trendline breaks reinforcing bullish sentiment. However, liquidity conditions are expected to deteriorate further this week as trading desks thin out for Christmas and New Year holidays, potentially amplifying price movements on any fresh policy signals. Traders are also watching for potential FX intervention rhetoric from Japanese authorities if appreciation becomes too rapid, though current levels haven't triggered official warnings.
Looking ahead, the January 15-16 BoJ policy meeting looms as the next major catalyst, with market participants scrutinizing the central bank's updated inflation forecasts and Governor Kazuo Ueda's post-decision press conference for guidance on the pace of future hikes. A more hawkish tilt could accelerate unwinding of popular short-yen positions that have built up over years, strategists warn. Conversely, any dovish surprise would likely trigger sharp reversals in what has become a crowded trade heading into 2026.
Disclaimer: This analysis is AI-generated for educational purposes. Traders should verify all information and conduct their own research before making trading decisions.