The Bank of Japan is widely expected to raise its policy rate to 1.25% at its September 17-18 meeting, a level not seen since April 1995. Yet the yen has already rallied ahead of the move, and analysts can't agree on whether it will react much further once the decision lands.
The Bank of Japan is widely expected to raise its policy interest rate to 1.25% at its September 17-18 meeting, a level the country hasn't seen since April 1995. Nearly every economist watching Japan has penciled this in. What they can't agree on is whether the yen will actually move.
Why the hike is coming
The data backing a tightening move is hard to argue with. Japan's second-quarter GDP growth was revised up to an annualized 1.4%. Real wages climbed 2.4% year-on-year in July, the strongest pace since 2021. Wholesale prices rose 7.6% year-on-year in August. Polls put the probability of a 25 basis point hike somewhere between 88% and 97%, depending on who's counting.
BOJ officials have signaled their direction clearly, flagging concern about inflation risks tied to a weaker yen, elevated oil prices, and AI-driven demand pressures. Forecasters are already looking past September: a follow-up hike to 1.75% is projected by the second quarter of 2027, with some expecting movement as early as January of that year.
So why isn't the yen reacting more?
The yen has already rallied, trading around 152-153 per dollar after spending much of the past year closer to the 164 range.
Speculators flipped to net long positions on the yen for the first time since February 2026, meaning the market has already repositioned. But the BOJ, mindful of the chaos that followed its surprise hike in August 2024, has been deliberately cautious in its communication. Analysts note that for the yen to move sharply higher still, the BOJ would need to either surprise on the size of the hike, signal a faster-than-expected path forward, or see the Federal Reserve ease policy at the same time, widening the interest rate differential in Japan's favor.
What this means for markets and traders
Japanese equities face a mixed picture. A stronger yen is generally a headwind for Japan's large export-oriented companies, whose overseas revenues shrink in yen terms as the currency appreciates. For forex traders, USD/JPY remains the most actively watched pair in this dynamic, and volatility may pick up around the September 18 decision if the BOJ's post-meeting language turns out more hawkish than expected.
Longer-term, a Japan operating with a policy rate at 1.25% and climbing toward 1.75% is a different investment landscape than the one that existed two years ago. The carry trade, which for years involved borrowing cheaply in yen to invest in higher-yielding currencies, becomes progressively less attractive as Japanese rates rise.
Source: Crypto Briefing
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