Bank of Japan Maintains Ultra-Loose Monetary Policy, Putting Pressure on the Yen
The Japanese regulator's decision to keep negative rates contributes to further weakening of USD/JPY, approaching multi-year highs.
Yen at Historic Lows: Why the Bank of Japan's Rate Hike Didn't Save the Currency
The Gist: What's Really Happening
On June 16, the Bank of Japan raised its key rate by 25 basis points to 1.00% — the first time since 1995, when the country was dealing with the aftermath of the burst financial bubble. The decision was made by a 7-to-1 vote, indicating broad consensus within the Board of Governors. However, the yen reacted to this historic event in the opposite way: instead of strengthening, the USD/JPY pair remained above the psychological level of 160 and even updated its yearly highs at one point.
The non-obvious insight is that the rate hike itself has long ceased to be a key driver for the Japanese currency. Markets had already priced in this move back in May, when inflation expectations began to accelerate. The real surprise was that the Bank of Japan did not give a clear signal about the timing of the next hike and also suspended plans to reduce government bond purchases starting April 2027. These two decisions effectively outweighed the rate hike itself.
In reality, the yen remains in negative real interest rate territory. With inflation around 2.2% and a rate of 1.0%, the real yield stays at minus 1.2%. This means the Japanese currency continues to be an ideal tool for carry trades, where investors borrow yen at low rates and invest in dollars or other high-yielding assets. As long as the spread between the Fed rate (3.50-3.75%) and the BOJ rate remains at 250-275 basis points, fundamental factors work against the yen.
Timeline and Context
The yen's weakening story began long before the current rate hike. Since exiting negative rates in 2024, the Bank of Japan has conducted four rounds of tightening, but each time the market reaction was short-lived. The USD/JPY dynamics accelerated after the Federal Reserve, led by Kevin Warsh, gave a hawkish signal on June 17, raising inflation forecasts and pricing in at least one rate hike by the end of 2026.
From June 15 to 19, a drama unfolded that mainstream media described superficially. First, oil prices fell amid the US-Iran deal to open the Strait of Hormuz. Then, the Bank of Japan raised rates, which markets ignored. Finally, the Fed's hawkish turn was the last straw for the yen. The USD/JPY pair broke through the 160.73 level — the mark where in April 2024 Japan's Ministry of Finance conducted currency interventions totaling $73 billion.
The key point was that the Bank of Japan did not signal a hike in July. Acting BOJ Governor Shinichi Uchida, at a press conference held after Governor Kazuo Ueda was hospitalized, avoided clear wording on the timing of the next step. Meanwhile, major Japanese institutional investors like Daiwa Research forecast that the next rate hike will occur no earlier than December 2026. This means that until the end of the year, the yen will remain in negative real rate territory, maintaining its status as a funding currency for carry trades.
| Event | Date | Impact on USD/JPY |
|---|---|---|
| BOJ rate hike to 1.0% | 16.06.2026 | Yen did not strengthen, pair remained above 160 |
| Hawkish Fed signal (Warsh) | 17.06.2026 | Treasury yields rose, USD/JPY accelerated |
| US-Iran deal on Strait of Hormuz | 15.06.2026 | Oil fell, reducing inflationary pressure on Japan but boosting risk appetite |
| Forecast for next rate hike | December 2026 | Yen stays in negative real territory until year-end |
Who Wins and Who Loses
The most obvious winners are Japanese exporters. A weak yen makes their products more competitive internationally. Shares of Toyota, Sony, and other giants continue to rise amid the weakening national currency. However, there is a catch: Japanese companies are increasingly moving production abroad, and a weak yen is no longer as clear a benefit as before. Rising costs for imported raw materials and energy eat into export gains.
The second group of beneficiaries are speculators betting on USD/JPY upside. According to the Commitments of Traders report, short yen positions have reached a record high. Hedge funds and major banks are increasing bets against the Japanese currency, ignoring intervention risks. According to MUFG, the volume of short yen positions has increased significantly over the past month, adding pressure on the currency and creating a risk of a sharp reversal in the event of any negative shock.
The main losers are Japanese households and small businesses. Rising prices for imported goods and energy hit purchasing power. Although Prime Minister Sanae Takaiti's government introduced a stimulus package worth about 117 billion euros and utility subsidies, this is not enough to fully compensate for inflationary pressure. In April 2026, real wages in Japan again turned negative, and analysts predict the situation will worsen if the yen does not stabilize.
The third group of losers is Japan's debt market. The yield on 10-year Japanese government bonds reached 2.75%, and 30-year bonds exceeded 4% in early May. The suspension of bond purchase reduction from April 2027 is an attempt to contain yield increases, but this move raises questions about the Bank of Japan's independence and may be perceived by markets as a concession to the government.
What the Media Isn't Saying
The main omission in public discourse is the link between falling oil prices and yen weakening. The logic is simple: the cheaper oil, the better for Japan as an energy importer. However, according to DBS Bank analysts, the Bank of Japan will not change its tightening trajectory even with a significant drop in oil prices. Moreover, cheap oil lowers inflation expectations, reducing the need for aggressive rate hikes. As a result, the differential with the Fed remains wide, and the dollar continues to strengthen. This is a paradoxical effect: what is good for the Japanese economy in the short term is bad for the yen on the forex market.
The second non-obvious point is the Ueda factor. His hospitalization on June 15 and absence from the meeting leadership received almost no attention in the Western press. Ueda is considered a dove on the Board of Governors, and his absence could theoretically have shifted the balance toward a more hawkish decision. Instead, Uchida took a cautious stance, giving no clear signal for July. Insider talk: rumors suggest that Ueda's absence was used by the conservative wing of the BOJ to push for softer rhetoric to avoid triggering a stock market crash.
The third nuance is the historical context of interventions. In April 2024, Japan's Ministry of Finance spent about $73 billion on currency interventions to curb USD/JPY growth. The effect was temporary — the pair fell 5.1% in one week but then recovered. Now the situation is fundamentally worse for interventions. The Fed just gave a hawkish signal, and the BOJ did not provide a clear plan for further hikes. If the Ministry intervenes now, it will be fighting not speculators but a macroeconomic trend. This is nearly a hopeless battle, and markets know it.
Forecast: Next 30 Days and 90 Days
On a 30-day horizon, the key event will be the reaction of Japan's Ministry of Finance as USD/JPY approaches the 161-162 level. If verbal interventions fail and the pair continues to rise, actual currency interventions similar to those in April 2024 can be expected. However, as FOREX.com analysts note, even if the Ministry intervenes, the effect will be short-lived, especially given the persistent wide rate differential.
The second factor is US and Japan inflation data in July. If US core PCE continues to accelerate, the Fed could give an even more hawkish signal, further boosting USD/JPY. Meanwhile, the Tokyo core CPI, a key indicator for the BOJ, slowed to 1.3% in May. This gives the regulator room for a pause but also removes support for the yen from tightening expectations.
On a 90-day horizon, everything will depend on geopolitics and energy prices. If the US-Iran deal holds and the Strait of Hormuz remains open, oil prices could fall to $64 per barrel by Q4 2026. This would lower inflation expectations in both the US and Japan, potentially narrowing the rate differential. However, in the baseline scenario, Daiwa Research assumes oil will stay around $90-100, and then the BOJ will be forced to raise rates to 1.25% by end of 2026.
Editorial Forecast
Based on current data, we expect that in the next 24-72 hours, the USD/JPY pair will maintain an upward trend, targeting the 161-162 level, where a new wave of verbal interventions from Japanese authorities is likely. Key levels: support at 160.00, resistance at 161.95 (2024 high). Confidence in the forecast is high, given record short yen positions and the persistent hawkish Fed stance. The main risk is an unexpected actual intervention by Japan's Ministry of Finance, which could trigger a sharp 3-5% correction in one session, similar to April 2024.
Shares of Japanese exporters (Toyota, Sony) remain in a growth zone amid a weak yen, but we recommend caution — in the event of an intervention or sentiment reversal, these stocks could correct 5-7%. Confidence in this forecast is medium, as intervention risks and uncertainty about BOJ policy persist.
This material is analytical in nature and does not constitute individual investment advice. All decisions to buy or sell assets are made by you independently based on your own risk assessment.
— Editorial Team
