After the Bank of Japan's rate hike, the yen weakened. What is the market waiting for? And the yen faces long-term depreciation pressure

Will the Japanese Yen continue to depreciate in 2026? This question has become even more uncertain after the Bank of Japan’s decision on December 19.

The central bank raised interest rates as expected, but the yen fell

On that day, the Bank of Japan raised its benchmark interest rate to 0.75%, the highest level since 1995, with a single hike of 25 basis points. Normally, rate hikes should support the yen’s appreciation, but market reactions were unexpected—the USD/JPY exchange rate actually strengthened.

ANZ Bank analyst Felix Ryan explained the logic behind this: the market did not receive clear guidance on the Bank of Japan’s future rate hike path. BOJ Governor Kazuo Ueda deliberately avoided specifying the timing of the next rate increase during the press conference, only stating that it is difficult to pre-commit to a neutral interest rate level (currently estimated to be in the range of 1.0%-2.5%). This ambiguous stance was interpreted as a dovish signal, weakening investors’ appetite for buying the yen.

What the market expects, but the central bank did not provide

According to the implied expectations from overnight index swaps (OIS), the market believes the BOJ will not raise rates to 1.00% until the third quarter of 2026 at the earliest. This timeline is accepted by many institutions as the baseline expectation.

Nomura Securities’ view is particularly critical: only if the central bank signals that the next rate hike could occur earlier than this schedule (for example, before April 2026) will the market truly interpret it as a hawkish signal, pushing the yen higher. Conversely, without significantly raising the neutral rate estimates, even if a rate hike occurs, it will be difficult for the BOJ Governor to convince the market that the terminal rate will be higher.

Depreciation pressure on the yen persists, and the interest rate differential structure remains challenging to change

Strategist Masahiko Loo of Dreyfus Investment Management maintains his view: the medium-term target for USD/JPY is in the 135-140 range, supported by the Federal Reserve remaining in an easing cycle and Japanese investors increasing FX hedging exposure from historically low levels.

ANZ Bank is more pessimistic, forecasting USD/JPY to rise to 153 by the end of 2026. The bank believes that the yen will remain significantly weaker than the G10 currency basket over the next year, primarily due to the persistent structural pressure from the interest rate differential between Japan and the US. Although the BOJ is expected to continue raising rates in 2026, the slow pace of hikes will be insufficient to reverse this trend.

In the short term, market disappointment over the lack of clear guidance from the central bank may intensify yen volatility. However, in the longer term, for the yen to escape its depreciation dilemma, the central bank needs to provide more hawkish guidance, and a shift in Federal Reserve monetary policy is also essential.