Yen Strengthens as BOJ Leaves Door Open for Interest Rate Hikes!

The Japanese yen continued to strengthen against the US dollar in trading on Friday (October 30, 2026), following the Bank of Japan’s (BOJ) decision to maintain its benchmark interest rate at 1.25%. The Japanese currency rose by approximately 0.4%, pushing the USD/JPY pair down toward 157.12. The decision, which aligned with market expectations, was reached with an 8-to-1 vote. Although interest rates remained unchanged, the BOJ’s statement—noting that underlying inflation has reached its 2% target—signaled that further monetary tightening remains a possibility.

The yen’s appreciation was bolstered by growing expectations for additional interest rate hikes, as the BOJ assessed that domestic inflationary pressures are becoming increasingly sustainable. The central bank also raised its inflation projections and warned of upside risks to prices stemming from high energy costs and a weaker yen. Furthermore, the BOJ announced an acceleration in the sale of its exchange-traded fund (ETF) holdings, increasing the annual pace from approximately 330 billion yen to 860 billion yen, effective January 2027. This move is viewed as a further step toward monetary normalization following years of extensive stimulus in Japan.

Meanwhile, the yen also drew support from an increased demand for safe-haven assets amid a downturn in global technology stocks. Concerns regarding the scale of investments in artificial intelligence (AI) prompted investors to reduce their exposure to riskier assets in favor of safer instruments, including Japanese government bonds (JGBs). The yield on the 10-year Japanese government bond fell by approximately 5.5 basis points to 2.78%. However, rising oil prices—driven by the risk of conflict between the United States and Iran—pose a challenge, given Japan’s heavy reliance on energy imports. Such conditions could potentially limit the yen’s gains if import costs continue to climb. The direction of the yen will be influenced by statements from Bank of Japan (BOJ) Governor Kazuo Ueda regarding a potential interest rate hike in December, trends in Japanese inflation, and the movements of the US dollar and US bond yields. If the BOJ strengthens its signals toward monetary tightening and the interest rate differential between Japan and the US narrows, the yen has the potential to continue strengthening. Conversely, if oil prices continue to rise or the Federal Reserve signals a hawkish stance, the yen’s recovery could face headwinds. In our view, the decision to keep interest rates unchanged at this time does not indicate a shift toward a dovish stance by the BOJ. In fact, the acknowledgment that underlying inflation has reached the target opens the door for further strengthening of the yen, even though global market volatility remains high.