BOJ Tightening Signals, Yet Markets Treat Yen as Lost Cause

• BOJ hike signals a brief lift in yen, but traders still expect long-term weakness to persist.
• Fiscal increase under Takaichi raises inflation risks and complicates BOJ tightening plans.
• U.S. yield dominance keeps yen a cheap funding currency despite Japan’s policy shifts.

The Japanese yen steadied early this week after months of pressure, as traders reacted to comments from Bank of Japan Governor Kazuo Ueda. Ueda said the central bank will review the “pros and cons” of raising interest rates at its December 18–19 meeting, prompting markets to lift the probability of a hike to nearly 80%. The remarks came as the currency traded near multi-year lows.

BOJ Cues Clash with Deep-Set Market Positioning

Ueda’s comments created a brief lift for the yen, yet the move followed a familiar pattern seen across 2024 and 2025. Traders often respond to hawkish language; however, they quickly revert to bearish yen positions once the initial reaction fades. 

This shows a long-running gap between BOJ policy signals and global macro expectations shaped by the wide U.S. rate premium. That divergence widened further after analysts at ING noted the yen could keep strengthening unless policymakers soften their tone. 

Their view indicated that foreign-exchange desks track BOJ messaging but still treat Japan’s overall rate path as minor relative to U.S. yields. This belief has held through previous episodes, including September’s verbal interventions and April’s speculation around adjustments to yield curve control.

The focus then changed to broader projections from BofA Securities, which indicated continued yen weakness into 2026. Analysts, including Shusuke Yamada, estimate that the dollar-yen pair could exceed 160 early next year before easing toward 155 by December. Their outlook pointed to persistent structural drivers, including fiscal risks and inflation-linked policies that complicate expectations for sustained currency strength.

Fiscal Plans and Tightening Efforts

The domestic backdrop added more uncertainty as Prime Minister Sanae Takaichi advanced a stimulus package worth about $137 billion. Her agenda, widely referred to as “Sanaenomics,” aims to support growth, yet it relies on heavy spending that could influence the rate debate. 

Takaichi has supported lower borrowing costs, which could conflict with BOJ actions if the central bank pushes ahead with policy normalization. Analysts at ING, including Min Joo Kang, noted that these plans could revive underlying inflation when food and fuel are excluded. 

Such a development could prompt additional tightening, further complicating the policy balance between government spending and central bank restraint. This mix of rising inflation risks and fiscal expansion created more questions about how long the BOJ can maintain a measured approach.

The market then examined the impact of the BOJ’s ongoing quantitative tightening campaign. The program reduces bond purchases while fiscal demands increase, raising concerns about financial sustainability. This combination could lift Japanese government bond yields and notably weaken the yen at the same time.

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Data Pressures Add Strain as Markets Watch the Fed

Economic data released this week added to the complexity. Real wages fell for a tenth straight month in October, while third-quarter output contracted more than earlier estimates showed. These trends pressed policymakers as they weigh tightening steps in an economy that continues to face weak income growth and soft household demand.

External forces then influenced the currency’s short-term direction. The yen climbed past 155 per dollar on Monday after broad U.S. dollar weakness emerged ahead of an expected quarter-point Federal Reserve rate cut. Markets still considered the U.S. rate path the dominant factor, suggesting that BOJ actions matter less than moves from Washington.

That sentiment supported the long-running view that the yen remains the world’s cheapest funding currency. Despite the BOJ’s signals, traders expect any hike to be too small to narrow the yield gap meaningfully. This keeps the divergence intact and maintains the structural case for continued yen selling.

The BOJ’s recent comments revived interest in Japan’s policy path, yet global traders still prioritize U.S. yields. Fiscal plans under Prime Minister Takaichi added new pressures that shaped expectations for inflation and rates. These overlapping factors emphasized the wide gap between BOJ messages and market conviction, keeping the yen under sustained strain.