Behind the Yen's New Low: Why Is the Bank of Japan Delaying Interest Rate Hikes?

The US dollar continues to strengthen against the Japanese yen, with the yen recently hitting an 8-month low. The main driver behind this is Japan’s central bank’s conservative stance. The rate decision on October 30th once again disappointed the market—Bank of Japan Governor Kazuo Ueda announced to keep the benchmark interest rate at 0.5%, marking the sixth consecutive month of no change.

Dovish Central Bank Stance, Market Sentiment Turns

After the rate announcement, investors long on the yen began to withdraw. According to Christopher Wong, FX strategist at OCBC Bank Singapore, the market was disappointed by the lack of clear hawkish signals from the Bank of Japan, leading to a large exodus of yen bulls, which directly pushed the USD/JPY exchange rate lower.

The decision-making committee was not entirely unanimous—committee members Takada Hajime and Tamura Naoki voted against the decision, advocating for a rate hike, aligning with last month’s stance. Nevertheless, Ueda did not signal any expectation of a rate increase. He emphasized in the statement that the economic outlook faces multiple risks, especially the impact of international trade policies on the global economy and prices, which remain highly uncertain.

Economic Data Looks Positive, but No Rate Hike in Sight

It is worth noting that the Bank of Japan raised its growth forecast in the latest economic outlook. The GDP growth forecast for this fiscal year was revised upward from 0.6% to 0.7%, and the core CPI forecast for 2026 was also raised from 1.9% to 2.0%. These data indicate a solid economic recovery in Japan, which should theoretically support expectations of a rate hike, but the central bank remains cautious.

The BOJ reiterated that if economic and price developments meet expectations, it will continue to gradually raise the benchmark interest rate. However, this statement is more of a policy stance declaration and has yet to translate into actual action.

New Prime Minister Sanae Yoshimura Becomes a Key Variable

Why has the Bank of Japan suddenly become so conservative? Masato Koike, senior economist at Sompo Institute Plus, believes that the appointment of the new Prime Minister Sanae Yoshimura may be a significant factor. Since Yoshimura has not yet expressed a clear stance on rate hikes, the BOJ might be deliberately avoiding an early increase, waiting for political signals.

This policy uncertainty directly impacts market expectations. Based on current data, the market estimates the probability of a rate hike at the BOJ’s December meeting to be around 40-50%.

US-Japan Policy Divergence Worsens Yen Depreciation

Former BOJ official and chief strategist at Fukuoka Financial Group, Tohru Sasaki, adjusted his rate hike expectations, delaying the original October possibility to April next year or later. He expects USD/JPY to further rally, possibly testing the 154-155 range.

Christopher Wong pointed out that although the slow pace of policy normalization by the BOJ has disappointed investors, the overall direction of rate hikes has not changed. The real driver behind the rising USD/JPY exchange rate is the policy divergence between the Federal Reserve and the Bank of Japan—US rate cuts versus Japan’s slow pace of hikes. This widening interest rate differential continues to exert downward pressure on the yen.

Outlook: Probability of Rate Hike This Year Uncertain

Based on various forecasts, the trend of the yen hitting new lows is unlikely to reverse in the short term. Unless a sharp depreciation of the yen triggers an emergency rate hike by the BOJ, the expectation of a rate increase in December remains uncertain. A 25 bps hike in January next year is very likely to be the start rather than the end of this cycle. Investors should closely monitor political developments and the pace of US rate cuts, as these two factors will directly determine the future trend of the yen.