The policy divergence between the Federal Reserve and the Bank of Japan is dramatically shaking the foreign exchange market, with the yen likely bearing the brunt.

On November 3, trading desk sources revealed that JPMorgan stated in its latest research report that the Fed unexpectedly adopted a hawkish stance at its October meeting, casting doubt on a December rate cut, while the BOJ maintained its dovish posture, rejecting market expectations of a rate hike. This stark contrast directly led to a sharp weakening of the yen.

The report noted that Fed Chair Jerome Powell's hawkish remarks following the October FOMC meeting caught markets off guard, with his cautious outlook on December rate cuts reigniting expectations of dollar strength. Meanwhile, the BOJ kept rates unchanged at its closely watched October policy meeting, defying market expectations of a 25-basis-point hike. Governor Kazuo Ueda's subsequent press conference further reinforced dovish signals.

This policy divergence propelled USD/JPY from around 152.20 to quickly breach 153, later climbing above 154 to hit its highest level since mid-February. Due to the central banks' policy split, JPMorgan revised its USD/JPY forecast upward, projecting it to reach 156 in Q4 2025, significantly higher than its previous estimate of 142.

(Daily USD/JPY exchange rate chart) The bank highlighted that current exchange rate movements reflect the ongoing impact of "Takaichi policy trades"—a strategy involving buying Japanese stocks while selling the yen. Models based on the TOPIX index and December BOJ rate hike probabilities suggest USD/JPY's fair value lies near the mid-154 range, indicating short-term upside risks. However, if USD/JPY surges well above 155, the risk of Japanese intervention would rise sharply, potentially capping further gains.

Fed's "Hawkish Surprise" Clouds Dollar Outlook JPMorgan noted that Chair Powell's "far from dovish" remarks during the October FOMC press conference shook market consensus for a December rate cut. This reflects growing tensions within the Fed over balancing employment and inflation targets, particularly amid healthy nominal growth of around 5%.

OIS curve reactions showed markets primarily scaled back December and January rate cut expectations, while leaving longer-term 2026 pricing largely unchanged.

(Powell's unexpected hawkishness led markets to sharply reduce December 2025 and January 2026 rate cut expectations, with minimal impact on the rest of the OIS curve) The bank views this asymmetric reaction as skepticism over the Fed's hawkish persistence, given its historical dovish bias, potential weak post-shutdown jobs data, and looming Fed independence concerns in early 2026. Markets broadly believe any labor market softening would undermine hawkish rhetoric, limiting the dollar's upside.

JPMorgan emphasized that while USD/JPY has surged on policy divergence, the pair is now "overshooting" and nearing intervention-sensitive levels. These factors make the dollar's near-term outlook "increasingly murky," constraining conditions for a sustained bull run.

BOJ's Dovish Tone Forces Major Yen Forecast Revisions Contrary to consensus, the BOJ kept its policy rate at 0.50% in October, defying JPMorgan's 25-bp hike expectation. Its Outlook Report also left growth and inflation forecasts unchanged. Governor Ueda's dovish press conference triggered broad yen selling, sending USD/JPY soaring from 152.20 pre-meeting to breach 153 and 154.

JPMorgan economists attribute this to the BOJ accommodating the "Takaichi government's" reflation and yen-depreciation preferences. Consequently, the bank now expects the next hike to be delayed until January 2026, prompting major USD/JPY target upgrades:

Q4 2025: 156 (prev. 142) Q1 2026: 152 (prev. 139) Q2 2026: 151 (prev. 139) Q3 2026: 150 (prev. 139)

"Takaichi Trades" Dominate, But Intervention Risks Loom The report states USD/JPY's recent moves can't be explained by rate differentials alone. Markets are now driven by "Takaichi trades"—buying Japanese equities while shorting the yen as BOJ hike expectations fade. A TOPIX-based model suggests USD/JPY's fair value is near 154.5. While upside risks persist while the BOJ stays passive, gains aren't unlimited.

JPMorgan warns intervention risks rise "significantly above 155." New Finance Minister Katayama's "high sense of urgency" remark signals readiness. Verbal or actual intervention from Japan's Ministry of Finance, a BOJ hawkish shift, or U.S. pressure could all cap further appreciation.

Looking ahead, JPMorgan expects USD/JPY to gradually resume its downtrend after the BOJ's next hike in January 2026.