Bank of Japan Rate Hike Confirmed, Yen Turns Down! Kazuo Ueda's Remarks 'Not Hawkish Enough,' Strategists Warn Downtrend May Continue

According to Zhitong Finance APP, the Bank of Japan raised interest rates by 25 basis points as expected on Friday, bringing the benchmark rate to 1.25%, the highest level in 31 years. However, this widely anticipated rate hike failed to boost the yen; instead, the currency weakened. At the time of writing, USD/JPY was trading at 157.83. Strategists believe that statements made by Bank of Japan Governor Kazuo Ueda during the press conference disappointed those investors expecting a more hawkish tone.

Reportedly, regarding the possibility of a 50 basis point hike or a series of rate increases, Ueda stated at the press conference: "It depends on how price developments evolve. There are various possibilities, and we should not rule out any options." "We are at a stage where we need to closely scrutinize various data. But that doesn't mean we can act slowly. We will thoroughly analyze the data and act promptly when necessary." He added: "As for the pace of future rate hikes, we do not have any preset ideas, such as once every three months. At each policy meeting, we will decide how best to ensure that underlying inflation stabilizes at 2%."

Ueda also said: "As we raise interest rates, financial conditions are becoming less accommodative... It is important to avoid tightening financial conditions too much by raising rates too aggressively, or triggering a sharp adjustment in asset prices."

Many strategists believe Ueda’s lack of hawkishness will weigh on the yen. Gerald Gan, Chief Investment Officer at Reed Capital, stated: "It appears (Ueda) is working to cool market sentiment. But my view remains unchanged, that yen weakness will persist in the short term." "The divergence in forward guidance between the Bank of Japan and the Federal Reserve is also increasingly becoming a concern regarding yen stability in the coming weeks."

Hiroshi Namioka, Chief Strategist at T&D Asset Management, commented: "It seems the market is finding it hard to interpret Ueda’s remarks. Although the yen strengthened against the dollar initially when he mentioned the 'policy stage,' it has since turned weak again." "Ueda's remarks may indicate that the Bank of Japan has become more cautious about prices overshooting the target. However, the bank has not articulated this very clearly, so the market appears to be reacting with uncertainty. Ueda also suggested prices could both overshoot or undershoot the target, so we cannot conclude the Bank of Japan has turned more hawkish."

Jumpei Tanaka, Chief Investment Strategist at Pictet Asset Management Japan, commented: "The statement that 'the stage of policy implementation has changed' gives the impression that the Bank of Japan has shifted to a higher gear on its rate hike policy. With long-term bond yields rising quickly, I think this message is vital for alleviating concerns that the Bank of Japan is 'behind the curve.'" "Considering there is structural pressure on the yen and that current market pricing shows little difference between the pace of rate hikes by the Fed and the Bank of Japan until mid-next year, it is unlikely that the outcome of this BOJ meeting alone will trigger a sustained appreciation trend for the yen."

Jumpei Tanaka also noted: "That said, trading is expected to be thin during the long weekend in Japan, and investors remain alert to potential coordinated intervention by the U.S. and Japan. Therefore, USD/JPY may continue to fluctuate without a clear direction."

Chidu Narayana, Chief Asia-Pacific Strategist at Wells Fargo, stated: "Ueda’s press conference sent some hawkish signals, but they were insufficient to support the market’s aggressive hawkish expectations. We still expect the Bank of Japan to continue raising rates, including a 50 basis point hike in the first half of 2027, but we see little chance of rapid hikes. In the short term, the BOJ’s lack of a strong hawkish stance, combined with a rebound in the dollar, should keep USD/JPY at high levels, putting pressure on the front end of the yen yield curve."

Shriya Samarth, Head of EMEA Rates at Stonex Financial, pointed out: "I think there’s a lot of conflicting information here—on one hand, an acknowledgment that policy priorities have shifted, but on the other, an unwillingness to commit to tackling upside inflation risks. This reminds me of the European Central Bank’s 'wait-and-see' stance for over a decade. In today’s environment, where credibility is a scarce resource, this approach is not considered hawkish enough. The ECB has learned from this and shifted its approach, and, in reality, Japan is equally exposed to Middle Eastern oil imports. Like the EU, I believe Japan should do the same." "Personally, I do not agree with this approach; I think there is too much balancing here—Ueda has always favored protecting economic growth over fighting inflation."

However, there are also strategists who are more optimistic about the yen’s outlook. Masahiro Yamaguchi, Head of Investment Research at SMBC Trust Bank, commented: "Considering the risk that the press conference might trigger a steep yen decline, my impression is that Governor Ueda handled it well. Other than the fact that two committee members opposed the hike, the Bank of Japan’s stance appears largely unchanged from before. Ueda's explanations match a scenario where the BOJ would step up rate hikes to every three months, so there is no need to change expectations for another hike in December this year. In this sense, I do not expect the yen to stay on a persistently weakening trend." "Impacts on bonds and equities may also be limited. For the bond market, the next focus will be on assessing the government's fiscal policy after the Cabinet reshuffle."

Beyond Ueda’s dovish remarks, the fact that two members of the BOJ Monetary Policy Committee voted against the rate hike on Friday also sparked concerns that the central bank is “not hawkish enough.” Of the nine committee members, Unityro Asada and Ayano Sato cast dissenting votes. Asada's reason was that core CPI (excluding fresh food) growth was below 2%, and that "the economic situation is not necessarily robust;" Sato argued that economic and inflation conditions have not improved significantly, so “now is not the right time” to raise rates.

On this matter, Masahiko Loo, Senior Fixed Income Strategist at State Street Investment Management, commented: "The market should not overreact to the dissent of the two members. They are among the more dovish members of the committee, while the majority still firmly supports Ueda’s normalization path. More importantly, Ueda refused to rule out possible policy actions in the future, reinforcing the message that every meeting remains live for changes."

"For the forex market, the logic for USD/JPY remains 'sell on rallies,' especially when approaching the 160 level. The medium-term trend will be determined by three broad structural factors—as the Bank of Japan normalizes policy, domestic yields rise; as Japanese assets regain investment appeal, institutional capital flows shift; and as investment linked to AI continues to flow into Japan." "These factors will collectively support a gradual reallocation of capital to Japan and further strengthen the broader 'Japan Is Back' narrative."

For the yen, the key threshold of 160 yen per dollar returns to investors’ focus. If investors believe the Bank of Japan’s pace of tightening will lag the Fed, USD/JPY could climb back toward 160. Given that the 25 basis point hike was already priced in, and the Bank of Japan’s communication interpreted as dovish, this risk is particularly noteworthy.

The yen's latest round of depreciation also brings the risk of intervention back into focus. This summer, Japan and the U.S. carried out their first coordinated yen-buying since 1998. Officials have emphasized the speed and disorderliness of exchange rate movements rather than any specific level, but the approach toward 160 could test their tolerance. According to the head of strategy at Astris Advisory Japan: "If the yen comes under pressure again and breaks below 160 per dollar, we should expect another round of coordinated intervention by Japan and the United States in the forex market."