After the Bank of Japan raised interest rates, the yen depreciated instead? Will there be further hikes in 2026?

On December 19, the Bank of Japan announced a 25 basis point rate hike, bringing the policy rate to 0.75%, the highest since 1995. Although this appears to be a hawkish move, it unexpectedly caused market confusion—the USD/JPY exchange rate actually appreciated, and the yen did not rebound as expected.

**Why didn't Governor Ueda give a clear signal?**

Governor Kazuo Ueda deliberately avoided specifying the timing of the next rate hike during the press conference. 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 adjust based on future conditions. This vague stance prevented the market from determining the pace of the Bank of Japan's rate hikes and was instead interpreted as a dovish move.

ANZ Bank strategist Felix Ryan pointed out that despite the Bank of Japan initiating rate hikes, the USD/JPY has risen, indicating that the market is still waiting for a clearer path of rate increases. He believes that even if the BOJ continues to raise rates in 2026, the yen will still lag behind G10 currencies because the interest rate differential remains unfavorable for the yen. ANZ Bank forecasts that by the end of 2026, the USD/JPY exchange rate will reach 153.

**What do institutions say about the 2026 outlook?**

DFA Investment Management strategist Masahiko Loo believes the market might interpret this rate hike as a dovish signal, causing short-term volatility in the yen. Considering the Federal Reserve's easing policies and Japanese investors increasing their foreign exchange hedging ratios, the firm maintains a long-term target of 135-140 for USD/JPY.

Nomura Securities further pointed out that only if guidance indicates that the next rate hike will occur earlier than expected (for example, before April 2026) will the market see it as a truly hawkish signal, triggering yen buying. Currently, overnight index swaps show market expectations that the BOJ will raise rates to 1.00% in the third quarter of 2026.

In other words, without significant updates to the neutral interest rate estimate, it will be difficult for the central bank governor to convince the market that the terminal rate will be higher. The future movement of the yen will depend on the central bank's subsequent communication strategies.