Yen exchange rate forecast faces a turning point? Bank of Japan sends ambiguous signals, market stalls

The Bank of Japan announced a 25 basis point rate hike on December 19, raising the benchmark interest rate to 0.75%, the highest in nearly thirty years. However, market reactions were surprising—the USD/JPY exchange rate actually rose, indicating that investors are divided on the central bank’s future policy path.

Rate hike met expectations, but guidance fell short

BOJ Governor Kazuo Ueda stated at a press conference that if economic and price developments proceed as expected, there is still room for further rate increases. However, he did not provide a clear timetable. Ueda mentioned that it is difficult to pre-commit to a neutral interest rate (target range of 1.0%-2.5%) and will adjust flexibly based on actual conditions.

This statement was interpreted by the market as lacking hawkish signals. ANZ Bank strategist Felix Ryan commented that although the central bank has begun policy tightening, the movement of the USD/JPY exchange rate diverged from expectations, reflecting ongoing market uncertainty about the pace of future rate hikes.

2026 rate hike expectations become focal point

According to Overnight Index Swap (OIS) data, the market currently expects the BOJ to raise rates to 1.00% by Q3 2026. ANZ Bank further predicts that by the end of 2026, the USD/JPY exchange rate could reach 153, as even with continued rate hikes, the interest rate differential environment remains unfavorable for the yen.

Fidelity Investment Management strategist Masahiko Loo maintains a more conservative yen forecast—USD/JPY will fluctuate between 135 and 140, reflecting the ongoing impact of the Fed’s easing expectations and the rising Japanese investor foreign exchange hedging ratio.

When can the yen appreciation be triggered?

Nomura Securities pointed out a key threshold: only when the BOJ signals that the next rate hike could be brought forward to before April 2026 will the market interpret it as a hawkish policy, triggering yen buying. Otherwise, without a significant upward revision to the neutral rate estimate, even if the governor makes hawkish statements, it will be difficult to convince the market that the terminal rate will be substantially raised.

This means that the key variable in yen exchange rate forecasts is not the rate hike itself, but the central bank’s commitment to the pace of increases. In the short term, the market may continue to interpret the BOJ’s policy as dovish, potentially increasing yen volatility.