After the Bank of Japan's rate hike, the yen has not shown strength, and market interpretations are now divided.

On December 19th, the Bank of Japan announced a 25 bps rate hike, raising the policy interest rate to 0.75%, the highest in nearly 30 years. However, after the rate hike announcement, the US dollar against the Japanese yen actually appreciated, breaking market expectations.

Rate hike signals less hawkish than expected

Ueda Kazuo was unable to provide clear policy guidance that the market was expecting during the press conference. He emphasized that it is difficult for the central bank to determine the neutral interest rate in advance, currently maintaining an estimated range of 1.0% to 2.5%, and stated that adjustments will be made when conditions allow. This ambiguous stance caused confusion in the market regarding the pace of subsequent rate hikes.

The central bank statement mentioned that if the economic and price outlooks align with current forecasts, the pace of rate hikes will continue. However, due to the lack of a specific timetable, the market generally interpreted this as a relatively dovish stance.

Market expectations vs. hawkish signals gap

ANZ Bank strategist Felix Ryan pointed out that although the Bank of Japan has initiated a rate hike cycle, the market still lacks clear understanding of future rate hike magnitude and frequency. The bank forecasts that by the end of 2026, the USD/JPY will reach 153, reflecting that even if the central bank continues to raise rates, the yen’s appreciation against the dollar will be limited.

“Interest rate differentials are a key factor,” Ryan said. Due to the Federal Reserve maintaining a relatively accommodative policy stance, the interest rate gap between Japan and the US still exerts pressure on the yen’s movement. It is expected that by 2026, the yen’s performance among G10 currencies will lag behind.

Based on overnight index swap (OIS) data, the market currently expects the Bank of Japan to raise rates to 1.00% by Q3 2026.

When can yen buying pressure be triggered?

Dreyfus Investment Management strategist Masahiko Loo believes that the market may have misinterpreted the central bank’s policy stance. The firm maintains a long-term USD/JPY target of 135-140, mainly supported by the Federal Reserve’s policy direction and Japanese investors’ continued increase in foreign exchange hedging ratios.

Nomura Securities further analyzed that only when the central bank guidance indicates an earlier rate hike than the market expects (for example, earlier than April 2026) will the market see it as a true hawkish signal, thereby pushing up the yen. In the absence of such clear commitments, the central bank governor will find it difficult to convince the market to accept higher terminal interest rate expectations.

In the short term, the yen’s trend chart indicates that exchange rate fluctuations are mainly driven by global interest rate differentials and risk sentiment, with the direct impact of a single rate hike decision being relatively limited.