After the central bank's rate hike, the yen depreciated instead, and this signal is a bit "dovish"

On December 19th, the Bank of Japan announced a 25 basis point rate hike as scheduled, raising the benchmark interest rate to 0.75%, the highest level since 1995. It sounds like a “hawkish” signal, but the market’s reaction was unexpected — the yen not only failed to strengthen but continued to remain under pressure.

Why didn’t the rate hike support the yen?

After the announcement, the USD/JPY exchange rate actually rose, a paradoxical phenomenon reflecting the market’s true sentiment: a single 25 basis point rate hike is not enough to change the yen’s relatively weak position.

Felix Ryan, a strategist at ANZ Bank, pointed out that although the Bank of Japan has begun its rate hike cycle, it does not provide a clear roadmap for future hikes that the market was expecting. BOJ Governor Ueda Kazuo deliberately avoided specifying the timing of the next rate increase during the press conference, only stating vaguely that “if economic and price outlooks develop as currently expected, the Bank will continue to raise rates.” This ambiguous language has hinted at a dovish tone.

What do institutions think?

Opinions on the yen’s future trend are divided:

ANZ Bank forecasts that although the Bank of Japan will continue its rate hikes into 2026, the yen will still underperform among G10 currencies due to the Federal Reserve’s accommodative policy stance and the persistent interest rate differential between Japan and the US. The bank’s target price for USD/JPY is 153.

Fidelity Investments takes a more conservative view. Strategist Masahiko Loo believes the market has overinterpreted the BOJ’s rate hikes as dovish signals, causing severe short-term volatility in the yen. With the Fed maintaining its accommodative policy, he maintains a long-term target of 135-140 for USD/JPY.

When is the market expecting a real turning point?

According to the overnight index swap (OIS) market expectations, investors believe the BOJ will not raise rates to 1.00% until Q3 2026, indicating a rather prolonged rate hike cycle.

Nomura Securities points out that only when the BOJ provides clearer guidance for earlier rate hikes (for example, before April 2026) will the market see it as a genuine hawkish signal. Otherwise, with no significant upward revision of the neutral rate estimate (currently 1.0%~2.5%), it will be difficult to convince the market that the yen will ultimately experience a strong appreciation.

This reflects a reality: compared to other G10 currencies, the yen has rebounded somewhat under the support of rate hikes, but long-term interest rate differentials and capital flows make it insufficient for reversing the yen’s weakness solely through rate hikes. In comparison, even the RMB may face similar structural pressures at certain times. Whether the BOJ’s pace of rate hikes can rewrite this situation remains to be seen through subsequent actions in 2026.