Will the Japanese Yen depreciate after the Bank of Japan raises interest rates? Will they continue to raise rates in 2026?

The Bank of Japan on December 19th, as scheduled, raised interest rates by 25 basis points, pushing the rate up to 0.75%—a 30-year high. However, the market’s reaction was somewhat “unexpected”: the USD/JPY exchange rate actually rose, and the yen did not strengthen as typically anticipated.

Why didn’t the rate hike support the yen?

The logic behind this is not complicated. Governor Ueda and his team did not give the market the “hawkish” signals expected—he was vague, saying that the specific timing of the next rate hike is difficult to determine and will be flexibly adjusted based on the neutral interest rate level (currently estimated between 1.0% and 2.5%). After hearing this, investors interpreted the rate hike as somewhat dovish, resulting in no significant yen buying surge.

Some analysts pointed out that the market is actually waiting for a clear signal: if the Bank of Japan indicates it will raise rates again before April 2026, that would be considered a truly hawkish stance and could trigger yen appreciation. But since no such commitment was made this time, the yen’s performance appeared somewhat weak.

What are the expectations for rate hikes in 2026?

According to overnight index swap (OIS) data, investors generally expect the Bank of Japan to raise rates to around 1.00% in the third quarter of 2026. This timeline is relatively long, reflecting cautious market attitudes toward further central bank actions.

Forecasts from various investment institutions vary widely. Some believe that although the Bank of Japan will continue to raise rates, due to the Federal Reserve possibly maintaining an easing policy and Japanese investors increasing foreign exchange hedging ratios from extremely low levels, USD/JPY might still be around 153 by the end of 2026. Others insist that the medium-term target for USD/JPY is in the 135-140 range, and short-term fluctuations are normal.

Yen, RMB, and the global exchange rate landscape

Interestingly, against the backdrop of a reshuffling of global exchange rates, the appeal of the yen as a safe-haven currency is waning. Meanwhile, the relative strength of the RMB against the yen is also changing—reflecting the shared challenges Asian currencies face amid diverging global interest rates. Investors are more focused on interest rate arbitrage opportunities rather than solely on individual central bank actions.

From another perspective, this rate hike by the Bank of Japan actually serves as a reminder: sometimes, a central bank’s “attitude” is more important than actual actions. The market needs not only numerical rate increases but also clear guidance on future policy paths. Ueda’s somewhat hesitant statements this time put pressure on the yen.

Overall, the path of the Bank of Japan’s rate hikes still has a long way to go, but the specific pace in 2026 remains to be seen. The movement of the yen exchange rate largely depends on Federal Reserve policies and global risk appetite changes; signals from the Bank of Japan alone may not be enough to change the overall situation.