## Why Does Rate Hike Implementation Instead Trigger Yen Depreciation and Why Is the Market Still Bearish?

The Bank of Japan's decision on December 19th delivered a "hawkish" report card—raising interest rates to 0.75%, the highest level since 1995. However, the market's reaction was unexpected: the USD/JPY exchange rate did not fall but instead rose, and the yen's trend became even weaker.

The logic behind this phenomenon warrants in-depth analysis. Felix Ryan, a strategist at ANZ Bank, pointed out that although the central bank has initiated a rate hike cycle, the market still lacks clear expectations regarding the pace of subsequent hikes. BOJ Governor Haruhiko Kuroda's attitude at the press conference was quite reserved—he did not specify a concrete timeframe for the next rate increase, instead emphasizing that it is difficult to lock in a neutral interest rate level in advance, only stating plans to update the forecast range if necessary (currently 1.0%–2.5%).

## The Spread Still Remains a "Hindrance" for the Yen

From an investor's perspective, a mere rate hike is insufficient to reverse the yen's weakness. Felix Ryan's view is that although the BOJ is expected to continue raising rates into 2026, the yen's performance against G10 currencies may still lag, primarily because the Japan-U.S. interest rate differential remains unfavorable for the yen. This institution predicts that USD/JPY will reach 153 by the end of 2026.

Fidelity Investment Management strategist Masahiko Loo offers a different interpretation of this decision—he believes the market perceives the central bank's actions as "not hawkish enough." The combined effect of the Federal Reserve's easing policies and Japanese investors increasing their foreign exchange hedging ratios continues to support USD/JPY trading in the 135–140 range. The firm maintains its long-term target forecast unchanged.

## The Pace of Rate Hikes in 2026 Becomes a Focus

What are market expectations? Overnight Index Swap (OIS) data shows traders expect the BOJ to raise rates to 1.00% as early as the third quarter of 2026. However, Nomura Securities warns that unless the BOJ signals that rate hikes could occur earlier than this schedule (for example, as early as April 2026), the market will find it difficult to interpret this as a truly hawkish move, and yen buying pressure will be hard to generate.

In other words, without significantly adjusting the neutral rate forecast, relying solely on verbal guidance makes it difficult for the market to believe that the BOJ is ambitious about pushing up the terminal rate. This is the core dilemma facing the current yen exchange rate—there is a significant perceptual gap between policy actions and market expectations.