After the policy meetings of the Federal Reserve and the Bank of Japan, traders are reducing their bets on a rebound in the yen as doubts arise about the pace of narrowing interest rate differentials between the USA and Japan.

Before the meetings held last week, strategists were betting that 2025 would be a year of yen strength. However, after Bank of Japan Governor Kazuo Ueda openly stated that the next interest rate hike might take longer, and the Federal Reserve indicated it would slow down the easing monetary policy next year, the market has become less optimistic about the yen's prospects.

Options Indicators show that, after the meetings concluded, traders' bullishness on the yen is at its lowest level in a month. CommodityFutures Trading Commission (CFTC)'s latest data shows that investors are significantly reducing their net short positions in US soybean, corn, and wheat contracts, easing bearish sentiment in the market.The latest data from the Commodity Futures Trading Commission (CFTC) for the week ending December 17 shows that leveraged funds have also increased their net short position in the yen to approximately 44,926 contracts, marking the highest level since macro fluctuations wreaked havoc in the global Forex market in July.

Strategists at Mizuho Securities Co. and Mitsui Sumitomo Insurance Co. have recently raised their forecasts for the USD/JPY exchange rate. Mizuho Securities has increased its forecast for the USD/JPY exchange rate at the end of 2025 from 130 to around 145, while Mitsui Sumitomo Insurance's current forecast is 140, up from an initial prediction of 130.

Tsukasa Sugiura, a market strategist at Mitsui Sumitomo Insurance, said: "Due to the extreme hawkish stance of the Federal Reserve and the extreme dovish stance of the Bank of Japan, we have changed our outlook. It now seems unlikely that the Bank of Japan will raise interest rates in January."

Ueda Kazuo stated at last Thursday's press conference after the decision that he needs more information regarding Japanese wages and Trump policies, as the exchange rate of the yen against the dollar fell to 157.93 last Friday, the lowest level since July. Currency strategists pointed out that if the Bank of Japan keeps interest rates unchanged before March or later next year, there is a risk of further yen weakness.

Some Analysts said the huge gap in interest rates could also lead to a resurgence of yen carry trades, where investors borrow in Japan and then invest the funds in higher-yielding markets; this popular strategy swept the global markets earlier this year.

Charu Chanana, chief investment strategist at Saxo Markets, said: "The Federal Reserve's hawkish tendencies and the Bank of Japan pausing interest rate hikes may provide new 'arbitrage' reasons for yen traders. The efforts to narrow the US-Japan interest rate differential have been pushed to after the first quarter of next year, so any yen appreciation may also be postponed to the second half of next year."

Mizuho strategists Masafumi Yamamoto and Masayoshi Mihara wrote in a report: "Currently, in the context of a relatively strong US economy and high interest rates, the dollar is likely to remain strong, so we have raised our forecasts for the dollar."

Strategists warned that the exchange rate of the yen against the dollar could fall to 160 in the near term, a level that would increase the risk of intervention and could even lead the Bank of Japan to raise interest rates ahead of schedule. Japanese Finance Minister Katsunobu Kato and top foreign exchange official Jun Mimura both warned last Friday that they would take appropriate action against excessive volatility.

Nomura analysts Kyohei Morita and Yujiro Goto wrote in a report: "We believe the Bank of Japan is more likely to wait until March next year to raise interest rates again." They revised their earlier call for a rate hike in January next year. They said: "In the short term, the risk of an overshoot in yen depreciation is high, but we are monitoring any verbal interventions and the possibility of a hawkish shift by the Bank of Japan." Ueda Kazuo will speak on Wednesday.