Why does the market remain bearish on the yen after the Bank of Japan raised interest rates by 25 basis points?

Decision Announced, Yen Weakens Instead

December 19th, the Bank of Japan (BOJ) decided to raise interest rates by 25 basis points as scheduled, bringing the policy rate up to 0.75%, the highest level since 1995. It appears to be a hawkish move, but the market’s reaction was unexpected— the USD/JPY exchange rate rose immediately, and the yen did not strengthen despite the rate hike.

The key is that BOJ Governor Ueda Haruhiko, in the subsequent press conference, was vague about the timeline for the next rate hike. He emphasized that it is difficult to determine the neutral interest rate level in advance (currently estimated between 1.0% and 2.5%) and plans to revise this estimate at an appropriate time. This ambiguous language disappointed the market.

Why Didn’t the Market Buy It? Lack of Clear Guidance

Felix Ryan, a strategist at ANZ Bank, pointed out sharply that although the BOJ has started its rate hike cycle, the market remains clueless about its future pace and magnitude of hikes. “It’s hard to determine the path of rate hikes in advance, so the yen cannot gain strong support,” he explained.

The institution forecasts that while the BOJ may continue raising rates into 2026, the yen will still underperform among G10 currencies in the near term. This is mainly due to interest rate differentials—under the backdrop of higher U.S. dollar interest rates, the yen’s attractiveness is limited. Based on this logic, ANZ Bank predicts USD/JPY will reach 153 by the end of 2026.

Fidelity Investment Management strategist Masahiko Loo offered another perspective: the market might have misinterpreted the BOJ’s rate hike as a dovish signal. Driven by the Fed’s easing cycle and Japanese investors increasing their foreign exchange hedging ratios, he maintains a long-term target of 135-140 for USD/JPY.

When Is the Next Step? The Market Is Guessing Frenziedly

Overnight Index Swaps (OIS) data shows traders expect the BOJ to raise rates to 1.00% by Q3 2026. However, Nomura Securities pointed out that only if the BOJ explicitly hints that the next rate hike could come earlier (for example, before April 2026) can the market interpret it as a truly hawkish stance, thus sparking yen buying.

In other words, under the current guidance framework, it is difficult for the BOJ Governor to convince the market that the terminal rate will be higher unless a new neutral rate estimate is provided as support. This also explains why the yen remains at the bottom after the rate hike announcement.