Why did the yen depreciate after the Bank of Japan raised interest rates? Experts analyze the 2026 interest rate outlook

The Bank of Japan announced its interest rate decision on December 19. Although it raised the benchmark interest rate by 25 basis points as expected to 0.75%, reaching a nearly 30-year high, the market reaction was unexpectedly mixed. After the announcement, the USD/JPY exchange rate actually appreciated, sparking widespread discussion in the market.

Interest rate hike implemented, but the yen shows little sign of strength

According to trading data, the USD/JPY maintained an upward trend following the rate hike announcement. Felix Ryan, a strategist at ANZ Bank, analyzed that although the Bank of Japan has started a rate hike cycle, market doubts remain about its subsequent policy pace. “The market has yet to receive clear guidance on the path of future rate hikes, which limits the yen’s appreciation potential,” he said. While it is expected that the Bank of Japan will continue raising rates into 2026, due to the interest rate differential disadvantage compared to the US, the yen is expected to remain relatively weak among G10 currencies. The bank forecasts that by the end of 2026, USD/JPY will rise to 153.

Bank of Japan Governor Ueda Kazuo’s comments at the press conference also drew attention. He did not provide clear guidance on the timing of the next rate hike but emphasized that it is difficult to determine the neutral interest rate level in advance and plans to revise the neutral rate estimate range (currently 1.0%~2.5%) as needed.

Why the market interprets the rate hike as dovish

Tom Kow, a strategist at State Street Global Advisors, pointed out that “the market may interpret the Bank of Japan’s rate hike as a dovish signal, leading to short-term volatility in the yen.” He believes that the relatively loose policy environment of the Federal Reserve, combined with Japanese investors increasing their foreign exchange hedging ratios from historically low levels, has collectively supported the US dollar. The institution maintains a long-term target of 135-140 for USD/JPY.

Nomura Securities further analyzed the shift in market expectations. According to overnight index swap data, the market currently expects the Bank of Japan to raise interest rates to 1.00% by Q3 2026. Nomura Securities noted that only when the central bank signals that the next rate hike could occur earlier than this schedule (for example, before April 2026) will the market view it as hawkish, triggering yen buying. “Without a clear upward revision of the neutral rate estimate, it will be difficult for the governor to convince the market that the terminal rate will be higher.”

The mutual influence between the RMB performance and the yen’s movement

As major Asian currencies, the correlation between the RMB and the yen is worth noting. In the current environment where the yen is relatively weak, the performance of the RMB against the yen is also indirectly affected. Market observers believe that if the Bank of Japan’s rate hike pace continues to fall short of expectations, the RMB’s relative advantage over the yen may become more apparent.