86% See Another BOJ Rate Hike. So Why Is the Yen Still Falling?

The Japanese Yen remains under pressure even as expectations for further Bank of Japan tightening continue to build, highlighting the widening gap between policy expectations and market reality.

A weaker Yen has become a growing source of concern for policymakers, driving up import costs and adding to domestic inflation pressures. While higher interest rates would normally support the currency, investors continue to favor the US Dollar as yield differentials remain firmly in its favor.

A Reuters survey found that 86% of economists expect the BOJ to raise interest rates by another 25 basis points to 1.25% before the end of the fourth quarter, up from 79% in the previous month's poll.

Looking further ahead, 70% of respondents believe rates will reach at least 1.50% by the second quarter of 2027, while just over half see 1.50% as the terminal rate.

Despite those expectations, the Yen's trade-weighted index has continued to weaken, suggesting the currency is losing ground not only against the US Dollar, but across a broad basket of major trading partners.

That has shifted the market's attention from whether the BOJ will hike to whether higher rates alone will be enough to stabilize the Yen.

Deutsche Bank believes Japan's policy focus may gradually move away from defending the currency and toward managing government bond yields instead. If that view proves correct, authorities could become more tolerant of Yen weakness as long as financial markets remain orderly.

Finance Minister Katayama Satsuki nevertheless reiterated that Japan stands ready to take decisive action in the foreign exchange market if excessive currency moves threaten economic stability.

For investors, the message is becoming increasingly clear: expectations for higher Japanese interest rates are rising, but until the policy gap with the US narrows more meaningfully, the Yen may continue to struggle despite the BOJ's tightening cycle.