The Bank of Japan raises interest rates to the highest level since 1995. Why has the yen weakened instead of strengthening?

The BOJ decision on December 19 once again became the focus. The central bank raised its policy interest rate by 25 basis points to 0.75%, creating a new high since 1995. This should have been a positive signal for the yen, but the market reaction was unexpected—the yen not only failed to appreciate, but the USD/JPY exchange rate actually rose, and the yen's performance against the RMB and other Asian currencies was similarly lackluster.

ANZ Bank strategist Felix Ryan explained this phenomenon: the market has yet to receive a clear roadmap from the BOJ regarding the future pace and magnitude of rate hikes. Governor Ueda Haruhiko did not provide a specific timetable for the next rate increase during the press conference, only stating that the estimate of the neutral rate (currently in the range of 1.0% to 2.5%) may need to be revised at an appropriate time. This ambiguous stance was interpreted as a lack of hawkish resolve, which instead pressured the yen.

The BOJ's "vague language" has become a key variable. State Street Global Advisors strategist Masahiko Loo pointed out that because the central bank did not provide a clear timetable for rate hikes, the market interpreted this as a wait-and-see attitude rather than an aggressive stance. While such a judgment may be overly pessimistic, the overnight index swap (OIS) market expects the BOJ to achieve a 1.00% rate target by Q3 2026, indicating a significant lag in progress.

Looking ahead, ANZ Bank forecasts the USD/JPY will reach 153 by the end of 2026, mainly because the interest rate differential environment remains unfavorable for the yen. The relatively accommodative stance of the Federal Reserve, combined with Japanese investors gradually increasing their foreign exchange hedging ratios, has suppressed the yen's performance against the RMB and other G10 currencies. Nomura Securities further pointed out that only when the BOJ signals a rate hike earlier than April 2026 will the market see it as a genuine hawkish shift, triggering yen buying.

In short, the rate hike decision itself is not enough to reverse the yen's decline; the key is whether the BOJ can provide more specific forward guidance. Currently, Governor Ueda's cautious attitude has instead constrained the yen's upward potential.