After the Bank of Japan's rate hike, the yen depreciated instead? What signals is the market waiting for

On December 19, the Bank of Japan (BOJ) proceeded with its policy adjustment as scheduled, raising the benchmark interest rate to 0.75%, the highest in nearly 30 years. This move was expected to trigger a yen appreciation wave, but the market reaction was surprisingly “lukewarm”—the USD/JPY exchange rate actually strengthened, and the underlying logic behind this warrants further analysis.

Hawkish or Dovish? The Market Is Conflicted

BOJ Governor Kazuo Ueda did not provide a clear timetable for the next rate hike during the press conference, only emphasizing that further increases would be pursued if economic prospects improve. This ambiguous stance disappointed the market. ANZ strategists believe that although the BOJ has taken action, investors most want to hear about—the pace of future rate hikes—remains unconfirmed.

According to expectations from the overnight index swap (OIS) market, most believe the next rate hike will not occur until Q3 2026. In other words, the market is betting that the BOJ will slow its pace. This contradicts investors’ hopes for a more aggressive path, putting pressure on the yen.

Wide Interest Rate Differentials Make Yen Hard to Rebound

Despite the BOJ raising rates, the Federal Reserve remains in a relatively accommodative stance. This widens the US-Japan interest rate differential, making dollar investments more attractive. ANZ forecasts that by the end of 2026, USD/JPY could rise to around 153, continuing its strength.

Analysis from Dreyfus Investment Management indicates that support from Fed policies and increased foreign exchange hedging by Japanese investors could keep USD/JPY in the 135-140 range for an extended period. Looking at the yen’s performance against the RMB and other currencies, the yen remains weak within the entire G10 currency system.

To Get Market Buy-In, the BOJ Needs Stronger Signals

Nomura Securities points out a key point: only when the BOJ signals that the next rate hike will occur before April 2026 will the market truly be triggered to buy large amounts of yen. The current policy adjustments are far from enough to change the market’s pessimistic outlook on the yen.

From another perspective, Ueda faces a dilemma: the neutral interest rate estimate range (1.0%-2.5%) still has room for upward revision, but without a significant increase in this target, it will be difficult to convince the market that the terminal rate will be higher. This also explains why the yen remains under pressure even after the rate hike.

The market is waiting for a clear signal: When will the next move come? How large will it be? Only when these questions are answered can the yen potentially rebound.