Japanese Yen Exchange Rate Fluctuations Intensify: Central Bank's Rate Hike Fails to Boost, Market Uncertain About Future Policies

The Bank of Japan on December 19th as scheduled raised interest rates by 25 basis points, bringing the benchmark rate up to 0.75%, the highest in nearly 30 years. However, after the rate hike announcement, the USD/JPY exchange rate continued to strengthen, an inverse performance that surprised the market.

Rate hike yet fails to support the yen, a signal the market cannot ignore

BOJ Governor Kazuo Ueda was unable to provide investors with a clear outlook during the press conference. He emphasized that the rate hike would continue but was vague about the timing and magnitude of future increases, stating that it is difficult to lock in a neutral interest rate level in advance and plans to revise the forecast range later (currently 1.0% to 2.5%).

ANZ Bank strategist Felix Ryan pointed out that although the BOJ has started a rate hike cycle, the yen’s exchange rate has not appreciated accordingly, reflecting market uncertainty about future policy directions. The bank believes that even if the BOJ continues to raise rates until 2026, the unfavorable interest rate differential factors will still constrain the yen’s performance, with the USD/JPY exchange rate expected to reach 153 by the end of the year.

Market interprets the rate hike as dovish, focus shifts to clearer guidance

DFA Investment Management strategist Masahiko Loo said that the market might interpret this rate hike decision as relatively conservative, mainly supported by the Fed’s easing stance and increased foreign exchange hedging ratios among Japanese investors. The bank maintains a medium-term target of USD/JPY 135 to 140.

Nomura Securities pointed out the key issue: only if the BOJ hints that the next rate hike could come earlier (for example, before April 2026) will the market see a hawkish stance, triggering yen buying. Otherwise, without significant updates to the neutral interest rate forecast, the central bank governor will find it difficult to convince the market that the ultimate rate target will be higher.

The overnight index swap (OIS) market is currently pricing in the BOJ raising rates to 1.00% in Q3 2026. Short-term fluctuations in the yen are expected to continue until the BOJ provides more specific policy guidance.