The Bank of Japan's rate hike struggles to shake the USD/JPY exchange rate, and the market is looking forward to more signals in 2026

After the Bank of Japan’s decision on December 19, an interesting phenomenon emerged: despite the rate hike, the yen weakened.

The Bank of Japan raised interest rates by 25 basis points to 0.75%, the highest level since 1995. From a policy perspective, this should have supported the yen, but the reality was quite the opposite—the USD/JPY exchange rate actually rose, reflecting market disappointment with the central bank’s policy.

Where is the problem? ANZ Bank strategist Felix Ryan provided a sharp analysis: the market has not received clear guidance on the future pace and magnitude of the BOJ’s rate hikes. Governor Ueda Haruhiko deliberately avoided specifying a timetable for the next rate increase during the press conference, and this ambiguous stance left investors uncertain about the central bank’s hawkishness.

According to institutional expectations, most market participants believe the BOJ will not raise rates to 1.00% until the third quarter of 2026. This timetable is generally interpreted as dovish—implying that rate hikes will not be as rapid as some might have thought. As a result, ANZ Bank predicts that by the end of 2026, the USD/JPY exchange rate could reach 153.

The interest rate differential remains a key factor suppressing the USD/JPY rate. Although the BOJ has begun its rate hike cycle, the relatively accommodative policies of the Federal Reserve, along with Japanese investors increasing their foreign exchange hedging ratios from historically low levels, all support the dollar. Masahiko Ioo, a strategist at Dreyfus Investment Management, believes these factors will keep USD/JPY stable in the 135-140 range for the long term, making it difficult for the yen to appreciate significantly in the short term.

It is important to note that the central bank governor emphasized during the press conference that if the economic and price outlooks develop as currently expected, the BOJ will continue to raise rates. However, since no specific timing for future hikes or new neutral rate targets (currently estimated between 1.0% and 2.5%) were provided, this statement’s policy intent remains relatively vague.

The market generally believes that only when the BOJ provides more hawkish guidance—such as hinting that the next rate hike could occur before April 2026—will a new round of yen buying be triggered. Nomura Securities pointed out that, in the absence of new neutral rate estimates, it is almost impossible for the BOJ to convince the market that the terminal rate will be higher.

Overall, while the December rate hike signaled a shift in Japan’s monetary policy, market expectations for the BOJ’s hawkish stance still persist. Under the long-term pressure of the Fed’s policy tone and global interest rate differentials, the USD/JPY trend in 2026 will continue to be influenced by the clarity of central bank policy guidance.