Overview: An Unusual Situation Where Rate Hikes Fail to Stem Currency Depreciation
The Bank of Japan (BOJ) will hold its Monetary Policy Meeting on January 22-23, 2026. Most market observers expect the central bank to maintain its policy rate at the current level of 0.75%. Despite raising rates to the highest level in approximately 30 years in December 2025, the yen continues to weaken, drawing significant attention to the future direction of monetary policy.
BOJ Governor Kazuo Ueda indicated in a January 2026 speech to Japan's business federation that wages and prices are likely to continue rising, signaling a continuation of the rate hike trajectory. However, he has also maintained a cautious stance, citing the need to assess uncertainties including U.S. tariff policies and global economic conditions.
The December 2025 Rate Hike: Reaching the Highest Level Since 1995
Background of the Decision
At its December 18-19, 2025 meeting, the BOJ unanimously decided to raise the policy rate by 0.25 percentage points from 0.5% to 0.75%. This marked the highest policy rate since 1995—a full 30 years.
The rate hike was driven by several factors:
- Continued wage growth outlook: Business surveys heading into the 2026 spring wage negotiations indicated expectations for continued robust wage increases
- Improving underlying inflation: Core consumer price inflation has been running above the 2% target
- Responding to yen weakness: The yen trading in the 155-158 range against the dollar has been adding inflationary pressure through higher import costs
Yen Weakness Persists Despite Rate Hike
Remarkably, the yen actually weakened following the rate decision. While higher interest rates typically strengthen a currency, the USD/JPY exchange rate moved to the upper 157 range after the December 19 announcement.
Market analysts point to several factors explaining this "paradox":
- Persistent U.S.-Japan interest rate differential: Even at 0.75%, Japan's rates remain far below U.S. rates (approximately 3.75%)
- Deeply negative real interest rates: After accounting for inflation, Japan's real interest rate remains significantly negative
- Dovish remarks from Governor Ueda: His comment that "there is no predetermined path for future rate hikes" was interpreted as cautious
- Fiscal expansion concerns: Prime Minister Sanae Takaichi's large budget plans are seen as adding yen-selling pressure
January 2026 Meeting Outlook: Status Quo Expected
Market Expectations
For the January 22-23, 2026 meeting, maintaining the current policy rate is the dominant expectation. According to Jiji Press, the BOJ is likely to revise its economic growth outlook upward while keeping monetary policy unchanged.
Reasons supporting the hold decision include:
- The December rate hike was recent, and the BOJ needs time to assess its impact
- External uncertainties including U.S. tariff policies persist
- The BOJ wants to confirm the results of the 2026 spring wage negotiations
Outlook Report and Key Focus Areas
The January meeting will release the quarterly Outlook for Economic Activity and Prices report. Updated forecasts for GDP growth and inflation through fiscal 2027 will provide crucial insight into the future pace of rate hikes.
Markets are pricing in the next rate hike around June-July 2026. Financial markets project the policy rate at approximately 0.9% after the June meeting, with a roughly 73% probability of a rate hike in the first half of 2026.
Impact on Households: Mortgage Rates on the Rise
Variable Rate Mortgages
Following the December rate hike, variable mortgage rates are expected to rise starting in April 2026. Since most financial institutions review their benchmark rates in April and October, the impact will likely begin appearing in July 2026 monthly payments.
Specific calculations show:
- 45 million yen loan: Cumulative rate increases since July 2024 (totaling 0.75%) result in approximately ¥14,000 higher monthly payments
- 50 million yen loan: If rates rise from 0.75% to 1%, monthly payments increase by approximately ¥6,000
Fixed Rate Mortgages
Fixed rates are tied to long-term interest rate movements. The 10-year Japanese Government Bond yield temporarily reached the 2% level in December 2025—the highest in approximately 26 years. The representative fixed-rate mortgage product "Flat 35" has risen above the 2% threshold in January 2026.
How Long Will Yen Weakness Continue?
Conditions for Yen Recovery
Economists cite the following conditions for yen weakness to subside:
- U.S. rate cuts: Continued Federal Reserve rate cuts narrowing the U.S.-Japan interest rate differential
- Steady BOJ rate hikes: Gradual increases bringing the policy rate above 1%
- Restored confidence in fiscal discipline: Eased market concerns about government fiscal management
Nomura Securities forecasts USD/JPY at 140 by the end of 2026, but this assumes narrowing interest rate differentials. If fiscal concerns persist, the effect of rate hikes could be offset.
Possibility of Currency Intervention
Vice Minister for International Affairs Atsushi Mimura has expressed vigilance about recent yen movements, describing them as "one-sided and sharp." As levels approach 160 yen per dollar, currency intervention similar to that seen in summer 2024 becomes a possibility.
International Perspective: Impact on the Global "Carry Trade"
Japan's rate increases have implications for global financial markets. Japan has long served as the funding currency for "carry trades," where investors borrow in low-yielding yen to invest in higher-yielding dollar assets.
If the BOJ continues raising rates, an unwinding of these carry trades could cause temporary disruption in global equity markets and risk assets. In August 2024, expectations of BOJ tightening triggered a global stock selloff.
Looking Ahead: Adapting to a "World with Interest Rates"
Approximately two years after ending its zero-interest-rate policy for the first time in 17 years, the BOJ is steadily transitioning Japan to a "world with interest rates." However, the persistent yen weakness suggests structural challenges that monetary policy alone cannot resolve.
Going forward, whether wage growth can keep pace with price increases—and whether real wages turn positive—will be crucial factors determining household purchasing power and the trajectory of monetary policy.
How does your country's central bank balance inflation control with economic stimulus? What discussions are happening about interest rate policies where you live? Share your thoughts in the comments!
References
- https://www.boj.or.jp/mopo/mpmsche_minu/index.htm
- https://www.nikkei.com/article/DGXZQOUB166040W5A211C2000000/
- https://tradingeconomics.com/japan/interest-rate
- https://www.cnbc.com/2025/12/19/bank-of-japan-boj-rate-cpi-inflation-takaichi-ueda.html
- https://www.forex.com/en/news-and-analysis/japanese-yen-weakens-despite-boj-hike-to-3-decade-high/
Reactions in Japan
Even at a 30-year high, there's still a 3% gap with the US, so of course the yen won't stop weakening. The BOJ says they're not raising rates for the exchange rate, but it's obvious they're concerned about it.
As someone with a variable rate mortgage, every BOJ meeting makes me nervous. Monthly payments have already gone up ¥14,000. If it goes up more, our household budget is seriously in trouble. Maybe I should have switched to fixed...
Governor Ueda's dovish comments pushed the yen weaker and the Nikkei soared. As someone holding export company stocks, I appreciate it, but if we break through 160, intervention is coming for sure.
They say wage increases will cover the rate hikes, but my company's base increase is only 2%? Prices are up more than 3%, and real wages keep falling. What are we supposed to do?
Higher rates mean higher deposit rates too, which is positive for regional banks like ours. But mortgage screening is getting stricter, and I'm concerned that young people's enthusiasm for home buying is declining.
Finally, time deposit rates are going up a bit. With zero interest for so long, there was basically no interest income, so I'm genuinely happy about this. Though it still doesn't keep up with inflation...
The yen's continued weakness despite rate hikes reflects not just interest rate differentials, but concerns about Japan's fiscal situation. Large fiscal spending with government debt at 230% of GDP risks losing market confidence.
Raw material costs have skyrocketed due to the weak yen. I want to raise prices but fear losing customers. But without wage increases, I can't hire. Borrowing costs are also up with rate hikes. I'm stuck in every direction.
Making huge profits on yen short positions lol. It's hilarious that USD/JPY doesn't drop even when BOJ raises rates. But I'm watching for intervention near 160, so maybe time to take profits.
The yen is weak again... It's over ¥20,000 more expensive than when I went to Hawaii last year. Overseas travel has become a luxury.
Prices go up every time I go to the supermarket, it's really tough. Rice is expensive, vegetables are expensive. I wish they'd do something about prices going up when wages don't.
I can feel that fewer people are able to get mortgages with rising rates. Especially downtown condos are too expensive - if rates go above 1%, the pool of buyers will shrink further.
The BOJ's neutral rate estimate is 1-2.5%, but we're still at 0.75%. 'Still some distance away' means there's plenty of room for hikes. Though the pace will likely be gradual.
Honestly, I thought rate changes didn't affect me, but hearing my senior colleagues talk about mortgages is making me a bit worried. Will I be able to buy a house in the future?
Thanks to the weak yen, our company posted record profits. Bonuses increased too. But living costs are also up due to import inflation, so overall it might be a wash.
As an FX trader, the yen weakening despite BOJ hikes isn't textbook behavior. But look at the rate differential - Japan's 0.75% vs US 3.75%. It's obvious where money flows. Until that gap narrows significantly, yen weakness will persist.
From a French perspective, the BOJ has been remarkably cautious. While the ECB aggressively raised rates to combat inflation, Japan maintained ultra-low rates for decades. Now trying to normalize feels too little, too late. The yen depreciation reflects this hesitation.
From Singapore, the weak yen means Japan travel is incredibly affordable! Going to Tokyo next month and it's like half the cost compared to a few years ago. Sorry for Japanese people, but as a tourist, this is great.
As a German institutional investor, Japan's situation is fascinating. Debt at 230% of GDP yet 30-year yields similar to Germany's? Something doesn't add up. A major correction is coming, the question is when.
In Brazil we have interest rates above 10%, so hearing Japan's 0.75% is a '30-year high' is mind-blowing! How do they control inflation? Different economic universe entirely.
As an Australian, the yen carry trade unwind is scary. When BOJ turned hawkish in August 2024, our stock market felt it too. Japan's policy changes have global ripple effects that people don't always appreciate.
From a Korean perspective, the weak yen/strong won hurts our exporters since Japanese competitors have price advantages. But seeing Japanese consumers struggle shows exchange rates are double-edged swords for everyone.
Japan's situation makes you think about central bank independence. BOJ hiked despite PM Takaichi initially opposing rate increases. Shows they're not completely bowing to political pressure, though the relationship seems tense.
As an Indian engineer interested in working in Japan, the weak yen means Japanese salaries have dropped significantly in USD terms. Japan might be losing attractiveness for global IT talent.
Irish economics student here. Japan fought deflation for decades, finally got inflation, and now they can't stop it. Really shows how tricky economic policy is. What works in theory doesn't always work in practice.
From Mexico, Japan's policy normalization is interesting. We have to maintain high rates to defend the peso. That Japan could operate with near-zero rates for decades shows economic strength we can only dream of.
In Denmark mortgage rates are near 5%, so hearing Japanese complain about rates below 1% feels surreal. But I understand - sudden increases after decades of zero rates must be painful to adjust to.
As a UK fund manager, we invest in Japanese equities but hedge the yen. Nikkei rises on weak yen, but currency losses offset returns for unhedged foreign investors. It's a complicated market to navigate.
As a Canadian, watching Japan's unique policy experiment is fascinating. Ending yield curve control and hiking rates - their approach is so different from other developed nations. Will be interesting to see long-term results.
From Italy, Japan's debt-to-GDP is higher than ours yet rates are far lower. Only possible because BOJ holds massive amounts of JGBs. But is it sustainable? At some point market forces usually prevail.