The Japanese Yen weakens after interest rate hikes! What is the market waiting for?

After the Bank of Japan announced its rate hike decision on December 19, an interesting phenomenon occurred—the Japanese yen did not rise as expected; instead, the USD/JPY exchange rate strengthened. This puzzled many investors: if the central bank is truly raising rates, why does the yen still fall?

Why Didn’t the Market Respond Positively to a 25 Basis Point Hike?

The Bank of Japan raised interest rates by 25 basis points as scheduled, bringing the benchmark rate to 0.75%, the highest in nearly 30 years. However, during the press conference, Governor Ueda Haruhiko’s remarks disappointed the market—he did not specify a timeline for the next rate hike and instead emphasized a “gradual adjustment” of the neutral rate estimate (currently set between 1.0% and 2.5%).

This ambiguous stance directly impacted the yen. Felix Ryan, a strategist at ANZ Bank, pointed out that the market was expecting clearer hawkish signals, but instead received a “dovish rate hike,” which put downward pressure on the yen.

Widening Interest Rate Differentials, Yen Falls Behind Among G10 Currencies

Although the Bank of Japan raised rates, the Federal Reserve maintained a relatively accommodative policy, resulting in a persistent negative interest rate differential for the yen. Felix Ryan forecasted that by the end of 2026, USD/JPY would rise to 153, indicating that the yen will remain under pressure over the next year.

Masahiko Loo, a strategist at State Street Global Advisors, added that Japanese investors are increasing their foreign exchange hedging ratios from historic lows, which also boosts demand for USD. The firm maintains a long-term USD/JPY target range of 135–140.

What Is the Market Really Waiting For?

Overnight Index Swaps (OIS) show that traders expect the Bank of Japan to raise rates to 1.00% only by Q3 2026. Nomura Securities pointed out that unless the BOJ provides a clear signal of “rate hikes before April 2026,” it will be insufficient to trigger yen buying.

In other words, will the yen rise again? The key is not how much the central bank has already raised rates, but how quickly it is willing to do so. Investors are looking for a more concrete timetable for rate hikes rather than vague commitments to “gradual adjustments.”

Under this expectation gap, the yen exchange rate will likely face short-term volatility.