Analyst: The Bank of Japan did not clearly explain the path of interest rate hikes. Short-term yen is weak but fluctuation is limited

The Zhitong Finance App learned that analysts said that since the Bank of Japan failed to give clear guidance on the timing of future monetary tightening, the exchange rate of the yen against the US dollar weakened. Earlier, the Bank of Japan raised the benchmark interest rate to the highest level since 1995, in line with expectations. After the latest interest rate decision was announced, the yield on Japanese treasury bonds rose, and the yield on Japanese 10-year treasury bonds surpassed 2% for the first time since 2006. After Bank of Japan Governor Kazuo Ueda held a press conference, the yen weakened, falling about 0.8%, and the dollar was around 156 against the yen.

Here's what the analysts say:

James Athey, portfolio manager at Marlborough Investment Management

Similar to previous interest rate hikes, the Bank of Japan has always been careful and thorough in its decisions to tighten monetary policy. The impression is that they ostensibly want to tighten their policies, but in reality they won't have the same impact on the market as before — so as not to be blamed for any negative consequences in the future.

Few investors are willing to take the risk of going long for yen during the holidays unless there is a good reason, and Kazuo Ueda doesn't give a good reason. 160 is still the level that many have long believed intervention is needed. So I'd be very surprised if USD/JPY surpassed 160.

Neil Newman, Head of Strategy, Astris Advisory Japan

Too late, and not enough effort. As the Federal Reserve may need to cut interest rates two more times, the Bank of Japan's policy interest rate will need to be raised to 1.25%-1.5% next year if it wants to contain the weakening yen. Considering that the 2024 stock market crash was blamed on a 0.25% rate hike, the stock market is rising today due to this news, which couldn't be better.

The TSE Bank Index has risen 40% so far this year, up 10% from a month ago. Maybe it's time to thank the deal and start looking for new investment targets.

Elias Haddad, Head of Global Market Strategy at Brown Brothers Harriman

The yen weakened after the Bank of Japan's policy adjustments, largely because the bank did not clearly adjust its expectations for the neutral interest rate range, which meant that the Bank of Japan chose to continue to maintain a loose monetary policy. However, we believe this statement is untenable, and the yen exchange rate will not fall below the support level. In our opinion, the Bank of Japan is hawkish in raising interest rates this time. First, the Bank of Japan warned that there is a low risk that companies' active wage setting will be disrupted, which means that potential wage and inflationary pressures may persist. Second, Bank of Japan Governor Ueda Kazuo pointed out that policy interest rates are still far from the lower limit of the neutral interest rate range. The Bank of Japan currently estimates a wide range of neutral interest rates, between 1% and 2.5%.

Junichiro Morimoto, Senior Analyst at Sony Financial Group

Judging from the Bank of Japan's monetary policy statement and Governor Kazuo Ueda's speech at the press conference, hawkish remarks are scattered among them. However, the market seems to be tending to sell off the yen. Next week is close to Christmas, and price fluctuations are expected to be light. USD/JPY lacks momentum to hit 160, and we expect the closing price to be around 155 by the end of the year.

Felix Ryan, strategist at ANZ Group Holdings

Although we expect the Bank of Japan to raise interest rates in 2026 (25 basis points in April), we believe the yen will still lag behind other G10 currencies in the coming year because interest spreads are still bad for the yen. We expect the USD/JPY exchange rate to reach 153 by the end of 2026.

Hiroshi Namioka, Chief Strategist at T&D Asset Management

The weakening of the yen and the rebound in the stock market may reflect an overly cautious reaction of the market before the announcement. The Bank of Japan said that even after policy adjustments, the real interest rate is still low, which indicates that the final interest rate is above 0.75%, and the rate hike cycle will continue.

Rong Ren Goh, fixed income portfolio manager at Eastspring Investments

Given that the Bank of Japan is currently trying to allow the economy to “overheat” for a period of time before using monetary policy tightening measures to curb economic overheating, the market is worried that interest rate hikes may be increased rather than reduced in the future, which increases the risk of rising interest rates. Therefore, if the Bank of Japan does not clearly indicate policy direction or make commitments, the market may continue to price the risk of its actions lagging behind.

Masahiro Yamaguchi, Head of Investment Research at SMBC Trust Bank

The yen fell as the market expected negative real interest rates to continue in the short term, while the weakening yen drove the stock market to continue to rise.

Eugenia Fabon Victorino, Head of Asian Strategy at SEB Bank Singapore

Although the statement did not rule out the possibility of further rate hikes, it did not indicate that the pace of austerity would change. Therefore, we expect the next rate hike until June and July next year at the earliest. Currently, the market has become accustomed to the Bank of Japan's gradual policy adjustment method.

The market has largely digested this decision. Since the Bank of Japan declined to disclose the timing of the next rate hike, the safest course of action is to increase the dollar against the yen. If USD/JPY were to fall from the current level to 152, the only hope is for the dollar to pull back. We expect this to happen in the first quarter.