Hawkish Bank of Japan Signals Will Buoy Yen, Strategists Say

The yen is primed for further gains after the Bank of Japan sent hawkish signals while raising the benchmark interest rate, according to strategists.

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Bloomberg News

Marcus Wong, Winnie Hsu and Matthew Burgess

Published Jan 24, 2025  •  4 minute read

Kazuo Ueda speaks during a news conference at the central bank's headquarters in Tokyo, Japan, on Friday, Jan. 24, 2025. Photographer: Akio Kon/Bloomberg Photo by Akio Kon /Bloomberg

(Bloomberg) — The yen is primed for further gains after the Bank of Japan sent hawkish signals while raising the benchmark interest rate, according to strategists.

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The upward revision in inflation expectations for the fiscal year 2025 has given the central bank room to raise rates again this year. In line with market expectations, the BOJ raised its key policy rate Friday to the highest level in 17 years.

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Here’s a selection of comments from analysts and strategists:

Wee Khoon Chong, senior APAC market strategist for BNY

The BOJ rate hike is supportive for the yen and it is likely to further strengthen from here. All eyes on the Ueda press conference next. USD/JPY might see another leg lower if Ueda sticks to the hawkish tone. The immediate technical supports for USD/JPY are around 155.06.

Wei Liang Chang, a strategist with DBS Bank Ltd. 

The BOJ is belatedly catching up on interest rates even as other central banks are starting to ease. A narrowing of short-term rate differentials should bump up the JPY in the short-term, even if today’s hike is largely anticipated. However, the BOJ’s slow pace of rate hikes, on top of likely trade frictions from Trump, means that USD/JPY could recover towards 160 with a strong USD.

Alvin Tan, FX strategist at Royal Bank of Canada

Ueda sounds more confident about further policy normalization, but he remains unwilling to provide any timetable for the next rate hike. At the same time, the market is already pricing in another 25bp hike in H2 2025. Our view is that USD/JPY 162 from last year is the high for this cycle. We are neutral on JPY this year, don’t see USD/JPY breaking through the 162 high from last year. I think another 25bp rate hike would be my baseline scenario, but risks of a third hike this year are growing in my view.

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Charu Chanana, chief investment strategist at Saxo Markets 

For the yen, we need to watch for a potential USD pivot with the Trump tariffs bark proving to be tougher than the bite, and the loud calls for lower interest rates. The yen has the potential to be a strong winner in case of any potential USD pivot, which clouds the outlook for Japanese exporters. Banks and other dividend plays in Japan remain interesting in this rising interest rate environment.

Rieko Otsuka, strategist at MCP Asset Management Japan

Bank stocks are being sold on profit taking while real estate sectors seem to be being bought on the dip as bad news wanes with the rate hike.

Hidetoshi Ohashi, chief credit strategist at Mizuho Securities

If Japan’s terminal rate “shifts higher than markets expectations, there could be a temporary buying pause of corporate bonds or a softening of supply and demand.”

Yujiro Goto, head of FX strategy at Nomura Securities Co.

The initial reaction was to sell the yen, but the yen is being bought back. The BOJ also maintained the statement that the current level of real interest rates is extremely low and that it will adjust the degree of easing. The impression is that the BOJ judges that there is still some distance to the neutral interest rate even after this rate hike. In a straightforward manner, the Bank of Japan does not consider 0.75% to be neutral, but rather a communication that raises expectations for a rate hike toward the 1% level.

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Eugenia Victorino, head of Asia strategy at Skandinaviska Enskilda Banken

The upward revisions in the inflation forecasts made it very difficult to maintain a dovish stance. While the tone is more hawkish than previous press conferences, it is not as if he is communicating the hikes will be coming back to back. At most, it may prompt the market to price in a higher terminal rate at 1.00% this year, instead of 0.75%. Overall, we are still expecting USD/JPY to go towards 150 by end-2025.

Richard Franulovich, head of FX strategy, Westpac Banking Corp. 

The BOJ overall, for me at least, is casting itself on the slightly more hawkish side with the CPI revisions, alongside ongoing signaling that upside risks remain and if forecasts are realized, more adjustment can be expected. It remains to be seen if Ueda delivers the same messaging.

Sean Callow, senior analyst at Intouch Capital Markets

The BOJ decision is being taken as at the hawkish end of expectations. The statement’s language on the monetary policy outlook makes clear that their working assumption is that rate hikes will continue. The forecasts were eye-catching, with the BOJ’s targeted inflation measure now projected to be 2% or above all the way through 2026. A close below USD/JPY 154.95 50-DMA could trigger a run to the levels prevailing before the December Fed-BOJ meeting double whammy.

Homin Lee, senior macro strategist at Lombard Odier

We will have to see how Ueda guides markets in the afternoon press conference, but we believe that the BOJ will go for a few more rate hikes above the 0.5% threshold that we previously viewed as a key hurdle. We think the BOJ’s policy normalization and Japan’s steady fundamentals will cap the upside for USD/JPY around 160 and eventually set the stage for the yen’s modest appreciation versus the US dollar in 12 months’ time.

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