Market contrast: Why did the yen exchange rate come under pressure after the Bank of Japan's rate hike?

The Bank of Japan’s decision on December 19th brought an unexpected outcome—despite implementing a rate hike, the yen did not strengthen as anticipated. The central bank raised the benchmark interest rate by 25 basis points to 0.75%, reaching a new high since 1995, but this hawkish move did not trigger yen buying; instead, the USD/JPY exchange rate rose.

Ambiguous Central Bank Stance, Market Interpretation Diverges

Governor Ueda emphasized in the statement that if economic and price outlooks unfold as expected, the BOJ will continue to raise rates. However, in the subsequent press conference, he did not specify the timing of the next rate hike. More importantly, Ueda admitted that it is difficult to determine the neutral interest rate in advance, with current estimates still in the range of 1.0% to 2.5%, and plans to adjust at an appropriate time.

This ambiguous stance has caused confusion in the market. Nomura Securities pointed out that only when the forward guidance indicates that rate hikes could be brought forward to before April 2026 will the market interpret it as a clear hawkish signal. Otherwise, in the absence of upward revisions to the neutral rate outlook, it is difficult for the governor to convince the market that the terminal rate will rise further.

Spread Still a “Hard Hurdle”

ANZ Bank strategist Felix Ryan analyzed that although the BOJ has started a rate hike cycle, the USD/JPY exchange rate remains on an upward trajectory, reflecting that market guidance on the pace and magnitude of future rate hikes remains unclear. The bank believes that even if the BOJ continues to raise rates in 2026, the yen will remain weak against G10 currencies over the next year—mainly because the interest rate differential environment still disadvantages the yen. ANZ Bank forecasts the USD/JPY rate will rise to 153 by the end of 2026.

DFA Investment Management strategist Masahiko Loo also mentioned that the continued easing policy of the Federal Reserve and the support from Japanese investors increasing their foreign exchange hedging ratios from historical lows are boosting the attractiveness of the dollar relative to the yen. The firm maintains a long-term target range of 135–140 for USD/JPY.

Market Expectations vs. Actual Progress

Overnight Index Swap (OIS) market data shows that traders generally expect the BOJ to raise rates to 1.00% by Q3 2026. This indicates that market expectations for the pace of rate hikes remain cautious and gradual. Ueda’s “moderate” stance was widely interpreted as dovish, which in turn raised concerns about the outlook for the yen.

Overall, short-term pressure on the yen remains unlikely to ease unless the BOJ’s future guidance clearly signals a more aggressive rate hike plan.