After the Bank of Japan raised interest rates by 25 basis points, why did the yen depreciate instead? What is the market waiting for?

On December 19, the Bank of Japan (BOJ) raised interest rates by 25 basis points to 0.75% as scheduled, reaching the highest level since 1995. However, surprisingly, the yen did not strengthen after the rate hike; instead, the USD/JPY exchange rate continued to rise.

Why did the yen fall despite rising interest rates?

The underlying logic is quite simple—the market was disappointed with the hawkishness of this rate hike. BOJ Governor Ueda Kazuo’s remarks at the press conference were somewhat vague, without clearly stating when the next rate hike would occur. He only ambiguously mentioned that “if economic and price outlooks proceed as planned, rate hikes will continue.” More painfully, his estimate of the neutral interest rate range (1.0%–2.5%) remained unchanged, leaving traders puzzled—how high will the BOJ raise rates?

ANZ Bank strategist Felix Ryan bluntly stated: the market lacks clear guidance on the path of rate hikes. While the Federal Reserve is easing monetary policy, the BOJ has not provided a clear timetable for future rate increases. Under these conditions, the yen remains relatively weak. They forecast that by the end of 2026, USD/JPY could reach 153.

The logic behind the movements of the Hong Kong dollar and yen is actually similar

Like the exchange rate logic between HKD and JPY, the strength of both currencies depends on interest rate differentials. Currently, the US-Japan interest rate spread still disadvantages the yen. The Fed’s easing combined with Japanese investors increasing their foreign exchange hedging ratios creates dual pressure, making it difficult for the yen to appreciate in the short term.

Fidelity Investment Management strategist Masahiko Loo said that the market might interpret this rate hike as a dovish signal, causing short-term volatility in the yen. The firm maintains a long-term target of 135–140 for USD/JPY.

Can the rate hike expectations in 2026 save the yen?

Overnight index swap (OIS) data shows that the market expects the BOJ to raise rates to 1.0% by Q3 2026. However, Nomura Securities provided a key insight: only if the rate hike guidance indicates that the next hike could come earlier (for example, before April 2026) will the market see this as a genuine hawkish signal, leading to yen buying.

In other words, without a “hard commitment” from Governor Ueda this time, the market is left on hold. Unless BOJ officials can demonstrate that the terminal rate will indeed be higher, the yen’s rebound will remain limited.

In summary, the BOJ’s rate hikes are too gradual, and the market does not see the hawkish resolve it desires, so the yen remains under pressure from the dollar. This situation may only improve when the rate hike guidance is updated in early 2026.