Japanese yen exchange rate experiences a huge shock! The Bank of Japan raises interest rates by 25 basis points, will it continue to increase in 2026?

Investment Insights - Bank of Japan Governor Ueda did not provide the hawkish signals the market wanted, and the yen exchange rate fell. On December 19, the Bank of Japan raised interest rates by 25 basis points as expected, bringing the rate up to 0.75%, the highest level since 1995. In the statement, the Bank of Japan emphasized that it would continue to raise rates if the economic and price outlooks were realized as currently judged. Governor Ueda did not provide clear guidance on the timing of the next rate hike during the press conference. He stated that it is difficult to determine the neutral interest rate level in advance and plans to revise the neutral rate estimate (1.0%~2.5%) if possible. After the resolution was announced, the USD/JPY initially fell before rising, breaking through 156. It continued to rise during the governor's remarks, approaching the 157 mark. [Source: TradingView; December 19 USD/JPY trend] Felix Ryan, a strategist at ANZ Bank, stated that although the Bank of Japan has initiated rate hikes, the USD/JPY exchange rate has actually risen, reflecting that the market has not received clear guidance on the pace and magnitude of future rate hikes. "While we expect the Bank of Japan to continue raising rates in 2026, we believe the yen will still lag behind the G10 crosses over the next year, as the interest rate differential remains unfavorable for the yen." The bank forecasts that by the end of 2026, the USD/JPY exchange rate will be 153. "The market may interpret the Bank of Japan's rate hike as dovish, leading to short-term fluctuations in the yen exchange rate." Masahiko Loo, a strategist at State Street Global Advisors, pointed out that supported by the Federal Reserve's loose policy and Japanese investors increasing their foreign exchange hedging ratios from historical lows, he maintains a longer-term target for USD/JPY at 135-140. Currently, overnight index swaps (OIS) indicate that the market expects the Bank of Japan to raise rates to 1.00% in the third quarter of 2026. Nomura Securities noted that the market would only interpret the guidance as a hawkish signal if it indicated that the next rate hike could occur earlier than this timeline (for example, before April 2026), which would trigger yen buying. Otherwise, without significantly updating the neutral rate estimate, it will be difficult for the central bank president to guide the market to believe that the terminal rate will be higher