The Bank of Japan's rate hike is ineffective; is the yen still unable to strengthen?

The December 19th rate hike decision disappointed the market. The Bank of Japan raised interest rates by 25 basis points as expected, to 0.75%, the highest level since 1995, which appears quite hawkish. But the problem is, after the rate hike announcement, the US dollar appreciated instead of depreciating, and the yen was not as strong as expected.

Why is the market not buying it?

ANZ Bank analyst Felix Ryan bluntly stated: Although the Bank of Japan took action, the USD/JPY exchange rate movement shows that the market didn’t get the signals it wanted — in other words, investors want to know how much and when the Bank of Japan will hike next, but Governor Ueda didn’t give a clear answer.

Governor Ueda and his remarks at the press conference were indeed vague. He emphasized plans to revise the neutral interest rate estimate (currently in the 1.0%~2.5% range), but didn’t specify when or how much it would change. This “I have a plan but won’t tell you” attitude leaves traders guessing.

Will the yen continue to depreciate in the future?

ANZ Bank predicts that even if the Bank of Japan continues to raise rates in 2026, the yen will remain weak against G10 currencies over the next year. The main reason is that interest rate differentials are unfavorable for the yen — US rates are high, and even if Japanese rates rise, they can’t keep up. They project the USD/JPY to reach 153 by the end of 2026.

Fidelity Investment Management strategist Masahiko Loo believes that the Federal Reserve’s easing policies and Japanese investors increasing their foreign exchange hedging ratios will support the USD/JPY to stay in the 135-140 range over the longer term.

When will we see a real rebound in the yen?

According to overnight index swap market pricing, investors expect the Bank of Japan to raise rates to 1.00% only by Q3 2026. However, Nomura Securities points out that only if the central bank signals that the next rate hike will come earlier (for example, in April 2026) will the market interpret this as hawkish and buy the yen.

In other words, the current dilemma is: although the Bank of Japan is raising rates, the magnitude and pace are not clear enough, so the market is treating it as dovish. Until the yen finds new support, it may continue to be under pressure.