Why is the USD/JPY exchange rate moving inversely? Insufficient signals of rate hikes from the Bank of Japan cause market confusion

On December 19, the Bank of Japan’s decision delivered an “unexpected” result — a 25 basis point rate hike to 0.75%, reaching a new high since 1995, but the subsequent yen-dollar exchange rate movement surprised the market.

Rate hike implemented, yen weakens

Generally, a rate hike by the central bank should boost the value of the domestic currency. However, after the announcement, the USD/JPY exchange rate rose instead, becoming a hot topic in the market. ANZ Bank strategist Felix Ryan explained: the market is actually uncertain about the Bank of Japan’s future policy path, so even with the rate hike, it’s not enough to support yen appreciation. In other words, the market wants not just a rate hike, but a clear pace of tightening.

The key is “lack of guidance”

Governor Ueda Haruhiko, in the post-meeting press conference, remained vague about the timing of the next rate hike. He said it’s difficult to lock in a neutral rate (currently estimated between 1.0% and 2.5%) in advance and plans to adjust this estimate flexibly based on economic conditions. This “leaving room” language was not seen as a hawkish signal by the market.

DFA Investment Manager strategist Masahiko Loo straightforwardly said that the market’s interpretation of this rate hike is dovish. He believes that the continued easing policy of the Federal Reserve and Japanese investors’ foreign exchange hedging operations jointly support the strength of the USD/JPY. The firm maintains a medium-term target of 135-140 for USD/JPY.

The 2026 suspense

Overnight index swap markets expect that the Bank of Japan might raise rates to 1.00% in the third quarter of 2026. ANZ Bank predicts that by the end of 2026, USD/JPY could rise to 153.

However, Nomura Securities pointed out that such market pricing is far from enough. Only when official guidance clearly indicates that the next rate hike could come earlier (for example, before April 2026) will the market truly buy into yen appreciation expectations. Without updated neutral rate estimates, it will be difficult for the central bank governor to convince the market that the long-term rate endpoint will be higher.

Overall, the short-term direction of USD/JPY still depends on whether the central bank can provide clearer policy outlooks. The current market confusion reflects that the focus is no longer on the rate number itself, but on a clear policy roadmap that is key to unlocking yen appreciation.