Raising interest rates but depreciating? The Bank of Japan's "dovish" move triggers a yen dilemma, and the RMB-JPY exchange rate may change

The Bank of Japan on December 19th proceeded with the rate hike as scheduled, but the market’s reaction was unexpected—rather than rising, the yen fell. What underlying logic is behind this?

Why did the 25 basis point hike fail to boost the yen?

The BOJ raised the benchmark interest rate to 0.75%, the highest level since 1995. On the surface, this rate hike should strengthen the yen’s attractiveness, but the USD/JPY exchange rate actually appreciated, indicating that market understanding and expectations for this rate hike are completely opposite.

ANZ Bank strategist Felix Ryan pointed out the core issue: the market’s disappointment with the yen’s outlook stems from a lack of clear signals regarding the future pace of rate hikes. Governor Ueda avoided providing a specific timetable for the next rate increase during the press conference, only stating that it is difficult to determine the neutral interest rate level in advance and plans to adjust projections (currently in the range of 1.0% to 2.5%) if possible. This ambiguous stance is interpreted as “dovish,” directly reducing the yen’s appeal.

Market dilemma: interest rate differentials still unfavorable for the yen

From a global currency comparison, the yen’s situation is awkward. Although the BOJ has begun a rate hike cycle, policy differences with other developed countries’ central banks, such as the Federal Reserve, remain significant. ANZ Bank forecasts that the USD/JPY exchange rate will reach 153 by the end of 2026, reflecting long-term upward pressure on the dollar relative to the yen.

This also indirectly influences the RMB/JPY exchange rate. When the dollar is strong, other non-USD currencies (including the yen and RMB) face depreciation pressures. Under this global liquidity landscape, the yen struggles to attract market favor.

Lack of policy guidance is the fundamental issue

DFA Investment Management strategist Masahiko Loo expressed a more direct view: the market may interpret this rate hike as dovish. According to Overnight Index Swap (OIS) data, the market generally expects the BOJ to raise rates to 1.00% only by the third quarter of 2026.

Nomura Securities pointed out that only when policy guidance indicates that the next rate hike could come earlier (for example, before April 2026) will the market see it as a genuine hawkish signal. Otherwise, with no significant updates to the neutral rate estimate, it will be difficult for the central bank to convince the market that the terminal rate will rise substantially.

The 2026 rate hike path remains uncertain

Ueda and Watanabe did not provide the “timeline commitment” that the market desires, leading to increased short-term yen volatility. The key factors moving forward include:

• Whether the neutral interest rate estimate will be significantly revised upward: The current range of 1.0% to 2.5% is broad; if the BOJ raises this estimate, it will send a stronger rate hike signal.
• Whether the pace of rate hikes will accelerate: The specific timetable for 2026 is crucial for the yen’s direction.
• How the global liquidity landscape will evolve: External factors such as Fed policy and RMB depreciation pressures will influence the yen’s relative position.

In the short term, supported by the Fed’s relatively loose policy and Japanese investors increasing foreign exchange hedging ratios from historical lows, USD/JPY may remain in the 135–140 range for a prolonged period. However, this also means the yen’s performance among G10 currencies will continue to lag, and the dynamics of RMB/JPY exchange rate will be constrained by this broader background.