The Bank of Japan's interest rate hike did not meet expectations, and the USD/JPY exchange rate trend diverged.

The Bank of Japan announced a 25 basis point rate hike on the 19th, raising the benchmark interest rate to 0.75%, reaching the highest level since 1995. However, the market reaction after the announcement was unexpected—the USD/JPY exchange rate did not rise accordingly but instead faced continued downward pressure. The reason behind this lies in the market’s lack of clear expectations regarding the central bank’s future policy direction.

Governor Ueda Maintains Cautious Stance, Market Turns from Disappointment

BOJ Governor Kazuo Ueda did not signal any aggressive rate hikes during the press conference that the market had anticipated. He stated that it is difficult to determine the exact level of the neutral interest rate in advance. Currently, the estimated range is between 1.0% and 2.5%, and he plans to adjust this estimate as needed. This ambiguous attitude has shattered investors’ optimistic expectations for yen appreciation.

According to the BOJ statement, as long as the economic and inflation outlook remains consistent with current assessments, the bank will continue its rate hike process. However, Ueda avoided providing specific guidance on the timing and magnitude of the next rate increase, leading the market to interpret this as a dovish stance. Felix Ryan, strategist at ANZ Bank, pointed out that despite the imminent rate hike, the USD/JPY exchange rate is showing an upward trend, fully reflecting market uncertainty about policy direction.

Diverging Views Among Institutions, 2026 Rate Hike Expectations Differ

Market participants have clear differences in their outlooks for the BOJ’s future pace of rate hikes. ANZ Bank expects the BOJ to continue raising rates into 2026 but believes that due to unfavorable interest rate differentials for the yen, the USD/JPY exchange rate will remain relatively weak. The bank forecasts that by the end of 2026, the USD/JPY rate will reach 153.

On the other hand, strategists at T. Rowe Price maintain a more conservative view, expecting the USD/JPY to stay within a range of 135 to 140 over the long term. They emphasize that the Fed’s accommodative policy and Japanese investors increasing their foreign exchange hedging ratios will continue to exert downward pressure on the yen.

Overnight Index Swap (OIS) market data shows that participants expect the BOJ to raise interest rates to 1.00% around Q3 2026. Nomura Securities analysts believe that only when the BOJ signals a possible rate hike earlier than that (e.g., before April 2026) will the market interpret it as a hawkish stance, triggering yen buying. Without significant revisions to the neutral rate estimate, Governor Ueda will find it difficult to convince the market that the ultimate rate will reach a higher level.

Outlook: USD/JPY Exchange Rate Depends on Clarity of Policy Guidance

The current direction of the USD/JPY exchange rate is no longer solely determined by whether rates are raised but also by market expectations of the BOJ’s future policy clarity. Only when the BOJ provides more concrete and aggressive rate hike guidance will the yen have a chance to regain investor favor. Until then, the persistent interest rate differentials and policy expectation gaps will continue to dominate the yen’s movement.