## Will the Yen Weaken After Japan's Rate Hike? Why the Market Isn't Buying It

On December 19, the Bank of Japan announced a rate hike, raising the benchmark interest rate to 0.75%, the highest in nearly 30 years. At first glance, this should be a strong signal, but the market's reaction was unexpectedly— the US dollar against the yen not only did not fall but actually appreciated.

**Central Bank's Ambiguous Stance and Insufficient Signals**

Bank of Japan Governor Haruhiko Kuroda's performance at the press conference became the main reason for market disappointment. Although the statement emphasized that if economic and price outlooks remain on current trajectories, the rate hike would continue, Kuroda did not provide clear guidance on the timing of the next rate increase. He stated that it is difficult to lock in a neutral interest rate level in advance and plans to revise the neutral rate estimate range (1.0%~2.5%) later.

ANZ Bank strategist Felix Ryan pointed out that despite the Bank of Japan initiating a rate hike cycle, the US dollar against the yen rose instead, reflecting the market's lack of clear expectations regarding the pace of future rate hikes. This ambiguous attitude was interpreted by the market as leaning towards a cautious or even dovish stance.

**Contradiction Between Market Expectations and Actual Guidance**

According to overnight index swap (OIS) data, the market currently expects the Bank of Japan to raise rates to 1.00% no earlier than Q3 2026. Nomura Securities analyst noted that only if the central bank signals an earlier rate hike than this expectation (for example, advancing to April 2026) would the market interpret it as a genuine hawkish signal, triggering yen buying. Otherwise, the central bank would find it difficult to convince the market that the terminal rate will be higher.

**Long-term Yen Still Under Pressure, Interest Rate Differential Hard to Reverse**

DFA Investment Management strategist Masahiko Loo maintains a long-term target of USD/JPY in the 135-140 range. He believes that the continued support from the Federal Reserve's easing policy, along with Japanese investors increasing their foreign exchange hedging ratios, will keep the yen relatively lagging among G10 currencies through 2026.

ANZ Bank also forecasts that by the end of 2026, USD/JPY will be around 153. The bank believes that although the BOJ is expected to continue raising rates in 2026, the interest rate differential disadvantage remains unfavorable for the yen, making it difficult to reverse the downward trend in the short term.

**Key Point: Insufficient Rate Hike to Change Market Expectations**

This rate hike decision by Japan exposed a significant gap between market and central bank expectations. Investors hoped for a more aggressive rate hike path, but the BOJ chose to remain cautious. In the absence of clear guidance, the yen's exchange rate will continue to depend on global interest rate differentials rather than the BOJ's actions itself.