The Bank of Japan (BOJ) raised its policy rate by a quarter point to 1.25% on September 18, 2026, marking the highest level in 31 years. However, the yen surprisingly plunged as much as 1.3% against the dollar following the announcement. This unexpected depreciation was largely attributed to a 7-2 split vote among board members, with Toichiro Asada and Ayano Sato opposing the hike, which was interpreted by strategists as a dovish signal and internal resistance to tighter policy.
Market participants, including strategists from Wells Fargo & Co. and Citigroup Inc., had anticipated that the BOJ might disappoint investors by being less hawkish than expected. The yen was trading around 156.02 per dollar before the decision, with Citigroup analysts expecting it to potentially reach 159 per dollar in the coming weeks. The post-hike yen weakness demonstrates that a rate hike alone is insufficient to rapidly narrow the interest rate differential between Japan and the US, especially with the Federal Reserve maintaining higher rates (3.75-4.00%) and signaling further increases.
Investor attention now shifts to the timing of the next rate hike. Experts predict a December rate hike is more likely than October, with only a 22% probability for October versus 63% for December according to Totan ICAP data. Economists like Yusuke Matsuo of Mizuho Securities and analysts at TD Securities also anticipate the next hike in December or early next year, allowing time to assess the current hike's effects. However, Governor Kazuo Ueda mentioned that consecutive or 50 basis point hikes are possible if price risks materialize.
The yen's outlook is also influenced by potential intervention from Japanese authorities. Authorities reportedly conducted rate checks around the 158 yen level, a move often preceding market intervention. The yen rebounded sharply after news of these rate checks, surging over 1 yen to the upper 156 yen per dollar range. With Japanese financial markets closed for holidays next week, there is heightened vigilance for potential interventions, as liquidity is lower during holidays, amplifying intervention effects. The Japanese government and BOJ have already intervened twice this year, deploying approximately 11 trillion yen and 15 trillion yen respectively to counter yen weakness.
