SINGAPORE – The Japanese yen is expected to see limited gains despite the Bank of Japan’s latest rate hike, as higher US interest rates continue to draw investors away.
The yen has weakened amid the wide US-Japan rate gap, but recently rebounded on expectations of tighter Japanese monetary policy and lower US rates.
The yen has fallen about 1.2 per cent to around 157.98 against the US dollar at the time of writing, after the BOJ raised its policy rate by 25 basis points to 1.25 per cent on Sept 18, its highest level in 31 years.
The move came two days after the US Federal Reserve raised its benchmark interest rate by 25 basis points to a range of 3.75 per cent to 4 per cent, its first increase since 2023.
Analysts said a more sustained recovery in the yen would likely require faster rate hikes in Japan or a narrowing of the interest-rate gap with the US.
Josh Gilbert, lead analyst for Asia-Pacific and the Middle East at trading platform eToro, said the BOJ’s decision was expected, but its split vote has raised doubts over how quickly it would tighten policy further.
Two board members voted to keep rates unchanged, suggesting that there is still resistance within the central bank to raising borrowing costs more quickly.
Gilbert noted that the US Fed’s recent rate hike means the gap between US and Japanese borrowing costs is narrowing too slowly to support the yen significantly.
“BOJ Governor Kazuo Ueda now has a big job on his hands and it will take something genuinely hawkish from him to turn the yen around and rebuild conviction in a move before year’s end,” he said.
Echoing the sentiment was Maybank Group head of foreign exchange research Saktiandi Supaat.
“The key question is how quickly the BOJ raises rates from here,” he said.
“A sustained recovery in the yen would require markets to price in a faster pace of rate increases, a higher eventual policy rate, or a narrowing of Japan’s interest-rate disadvantage against other major economies.”
The immediate impact of the BOJ’s rate hike is likely to be limited as it was widely anticipated, but it should provide some support for the yen over time by raising the cost of borrowing the currency, he noted.
Against the Singdollar, the yen fell about 1.1 per cent to around 123.71.
The yen weakened 5.1 per cent against the Singapore dollar in 2025 and has fallen a further 0.4 per cent so far in 2026.
Saktiandi said the yen is likely to remain sensitive to signals from the BOJ and movements in US bond yields in the near term.
“Over the medium term, our outlook remains measured… BOJ tightening could support the yen, but relatively low Japanese short-term rates and fiscal concerns continue to constrain its recovery.”
Maybank expects the currency to trade at 157 yen per US dollar at the end of 2026, before strengthening slightly to 156 in the first half of 2027.
Against the Singapore dollar, it expects the yen to remain “broadly stable” at around 125 yen per Singdollar through the first half of 2027.
OCBC Bank foreign exchange strategist Christopher Wong also expects the Singdollar to remain relatively resilient against the yen in the near term, supported by the Republic’s exchange-rate policy and its lower sensitivity to swings in global interest rates.
However, the yen could begin to strengthen against the Singapore dollar if investors start expecting the BOJ to raise rates sooner than previously thought, or if more Japanese investors bring funds held overseas back home.
“Yen volatility is likely to remain elevated, with direction sensitive to the BOJ rate path, differences between US and Japan bond yields, shifting oil prices and any interventions by Japanese authorities to support the currency,” said Wong.
