Key Moments
- Markets recently priced in about an 80% chance of a rate hike at the Bank of Japan’s December 18-19 meeting. This is up from roughly 60% in late November.
- BofA Securities analysts projected USD/JPY could climb above 160 early in 2026 before ending the year at 155, with EUR/JPY seen at 190 in the first half of the year.
- Sanae Takaichi’s proposed $137 billion “Sanaenomics” program and ongoing BOJ quantitative tightening were flagged as potential drivers of higher bond yields and a weaker yen.
Yen Steadies as BOJ Signals Rate-Hike Debate
The Japanese yen stabilized earlier this week. This eased some expectations that Japanese authorities might intervene to support a currency trading near levels not seen in roughly four decades.
Supporting the yen’s pause, Bank of Japan Governor Kazuo Ueda stated that the central bank will need to weigh the “pros and cons” of raising interest rates at its next policy meeting. Following these comments, markets priced in about an 80% chance of a rate hike at the December 18-19 gathering. This is up from roughly 60% in late November.
Meanwhile, analysts at ING noted on Tuesday that the modest rebound in the yen versus the U.S. dollar after Ueda’s remarks could continue. However, this may change if the central bank softens its hawkish tone.
Strategists See Extended Yen Weakness Into 2026
Despite the recent stabilization, BofA Securities analysts expect yen softness seen through much of 2025 to carry over into the following year. They cited inflationary policy dynamics and fiscal concerns as key drivers behind their outlook.
In a note to clients, a team including Shusuke Yamada projected that USD/JPY could rise above 160 early next year. Later, it may retreat to 155 by year-end. Their projections for the euro pairing implied additional depreciation, with EUR/JPY anticipated to reach 190 in the first half of the year.
| Currency Pair | Timeframe | Projected Level | Source |
|---|---|---|---|
| USD/JPY | Early 2026 | Above 160 | BofA Securities |
| USD/JPY | End of 2026 | 155 | BofA Securities |
| EUR/JPY | First half of the year ahead | 190 | BofA Securities |
“Sanaenomics” and Policy Tensions
The currency outlook is unfolding against a changing political and policy backdrop in Japan. New Prime Minister Sanae Takaichi has put forward a large-scale policy package, branded “Sanaenomics,” totaling about $137 billion and designed to stimulate economic growth.
Takaichi has also been a prominent supporter of maintaining lower interest rates. This stance could create friction with the Bank of Japan as the central bank works to normalize interest rates after an extended stretch of ultra-low borrowing costs aimed at bolstering activity.
ING analysts, including Min Joo Kang, cautioned that the measures proposed under Sanaenomics could reignite underlying inflation once volatile components such as food and fuel are excluded. In their view, such a development could encourage the Bank of Japan to continue lifting interest rates.
Fiscal Concerns, Bond Yields, and the Yen
At the same time, the Bank of Japan’s ongoing quantitative tightening, combined with potentially forceful fiscal expansion under Sanaenomics, could heighten market unease about Japan’s fiscal trajectory, the analysts argued.
They suggested that this combination may push Japanese government bond yields higher while dragging on the yen’s value, creating a backdrop in which both borrowing costs rise and the currency weakens.
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