Yen’s decline hard to stop? Investment banks assess BOJ decision: The hawkish signal is “not strong”, everyone is waiting for a rate hike in April.

After the Bank of Japan kept interest rates unchanged, the yen continued its decline. Most strategists believe that the hawkish signals released by the central bank are not strong enough to reverse the yen’s weakness. The market’s focus has shifted to the possible rate hike in April, but before the Federal Reserve meeting, investor sentiment toward the yen remains cautious.

On January 23, the Bank of Japan held the benchmark interest rate at a thirty-year high as expected. After the announcement, the yen once fell 0.2% against the dollar to 158.74. The central bank is assessing the impact of last month's rate hike on the economy.

Several strategists pointed out that although the Bank of Japan appeared somewhat hawkish in its inflation forecast and wording, it failed to provide strong enough signals to support the yen. Market pricing shows that investors still remain cautious about rate hike expectations for the rest of the year.

In the short term, the yen faces further downward pressure. Strategists say that before the results of the Federal Reserve meeting are clear, the foreign exchange market is unlikely to respond decisively to the Bank of Japan’s subtle policy shift. The market’s attention is focused on Governor Kazuo Ueda’s press conference to find more clues about a possible rate hike in April.

Resolution Slightly Hawkish, Yen Still Under Pressure

The Bank of Japan’s decision to hold rates was in line with market expectations, but changes in the details of the statement prompted strategists to interpret the policy outlook.

Frederic Neumann, Chief Asia Economist at HSBC Holdings, said the Bank of Japan’s upward revision of inflation forecasts indicates a hawkish tilt by officials. By raising inflation expectations, monetary policy officials expressed greater confidence in the price outlook, which in turn should strengthen the case for further rate hikes. He pointed out that Japan’s bond market and currency rate should benefit from stronger monetary policy anchoring, and the central bank’s hawkish bias would help curb volatility.

Yujiro Goto, FX strategist at Nomura Securities, believes the BOJ’s communication is intended to convey awareness of an April rate hike. Before this meeting, the market had already fully priced in expectations of a rate hike before July. Although the resolution appears hawkish, before the press conference, depreciation pressure on the yen is still brewing.

Shogo Karitani, strategist at Minato Bank, pointed out that the statement added language stating that exchange rate fluctuations are more likely to affect prices and may impact the underlying inflation trend. Although the market hoped for stronger wording on yen weakness, it did not materialize, keeping the depreciation pressure unchanged.

Inflation Forecast Raised, Trade Uncertainty Phrasing Removed

The BOJ’s judgment on the economic outlook is more optimistic than before, which has become a key basis for strategists to view the decision as hawkish.

Eugenia Fabon Victorino, Head of Asia Strategy at SEB, said the economic forecast is more optimistic than last October's. The Bank of Japan also deleted phrasing about a “high degree of uncertainty caused by trade impacts,” which reinforces her view that the BOJ will continue tightening policy through 2026. However, she expects the next rate hike will occur in July.

Victorino also reminds that, historically, Kazuo Ueda has not been able to provide sufficiently hawkish guidance to satisfy the market. As long as fiscal concerns dominate, Ueda is unlikely to stop the buildup of dollar-yen buying.

Naomi Muguruma, Chief Bond Strategist at Mitsubishi UFJ Morgan Stanley Securities, pointed out that the market expects a rate hike in April because board member Takada is advocating for higher rates and the assessment of core inflation is strengthening. Long-term interest rates will continue to fluctuate.

Mamoru Shimode, Chief Strategist at Resona Asset Management, said the prospects for inflation and wages are relatively strong, which makes the tone somewhat hawkish. With the rise in two-year bond yields, the market has started to subtly price in a rate hike in April. Kazuo Ueda’s press conference may include remarks laying the foundation for an April rate hike.

April or July? Market Divergence Remains

Although most strategists view the decision as hawkish, there’s a clear divide on the timing of the next rate hike.

Nomura’s Goto explicitly noted that the BOJ’s communication is meant to hint at a possible April rate hike, and before the meeting, expectations for a rate hike before July had already been fully priced in by the market.

SEB’s Victorino holds a different view, predicting the next rate hike will be in July. She said she will closely watch the press conference later that night to see whether Ueda hints at a quicker tightening pace this year.

Hiromi Ishihara, Head of Equities at Amundi Japan, analyzing from a market pricing perspective, says the market actually believes current rates may be too low relative to existing inflation levels. In the short term, the yen is likely to weaken further, but government intervention may occur. Thus, she does not expect a disorderly yen selloff, nor does she expect the yen to appreciate in the near term.

Fed Meeting Becomes the Key Variable

Strategists stress that until the Federal Reserve meeting results are clear, the FX market is unlikely to respond decisively to the BOJ’s subtle signals.

Shimode pointed out that while Japan’s government bond market can more easily digest the BOJ’s slightly hawkish communications, the FX market faces uncertainty before the Fed meeting. If the Fed sends hawkish signals, the yen could face selling pressure, making it hard for investors to act decisively now. Regarding Ueda’s press conference, the bond market may be more sensitive today.

He also said that stocks face the major event of the elections, and earnings season has begun. Therefore, even if the BOJ’s hawkish tone has some negative impact, investors are unlikely to be overly pessimistic.

HSBC’s Neumann emphasized that all eyes are now on the press conference, and investors may be looking for hawkish signals. Japan’s bond market and exchange rate will benefit from stronger monetary policy anchoring.

Muguruma of Mitsubishi UFJ Morgan Stanley said that, affected by expectations of a rate hike in April, long-term interest rates will continue to fluctuate, and the market will remain highly focused on BOJ policy moves.

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