UBS, Commerzbank doubt yen recovery after BOJ’s 31-year-high rate hike

The Bank of Japan raised its policy rate to 1.25% last Friday — the highest level in 31 years — but major European banks say the move is unlikely to produce a lasting recovery for the yen.

UBS ↗ 0.43% said the hike, which passed by a 7-2 vote, will not trigger sustained yen appreciation against the dollar. The firm characterized Governor Kazuo Ueda's post-decision messaging as balanced but noted it stopped short of signaling an aggressive tightening cycle ahead. UBS maintained its base case for USD/JPY to trade sideways, forecasting 160 by December 2026 and 158 from March through September 2027.Reuters+1

Split Vote Clouds Outlook

The dissenting votes from board members Toichiro Asada and Ayano Sato added to market uncertainty about the BOJ's willingness to tighten further. While the decision was widely expected — Reuters reported ahead of the meeting that a majority of economists had forecast the September hike — the lack of unanimity undercut any hawkish signal.equiti+3

According to Reuters, Governor Ueda signaled the central bank has entered "a new phase focused on preventing inflation from overshooting its target," leaving the door open to further hikes. Yet UBS views the BOJ's normalization stance as merely sufficient to prevent the yen from weakening past 160 on the dollar, rather than a catalyst for appreciation.Reuters+1

Commerzbank Warns of Credibility Risk

Commerzbank struck a more cautionary tone. Analyst Thu Lan Nguyen argued that the BOJ risks losing market credibility if it delays further action, warning that "merely threatening intervention is unlikely to be enough".bitget

"The longer it tries to balance currency stability against economic growth, the greater the risk that it ultimately loses control of both," Nguyen wrote, drawing a parallel to Sweden's Riksbank, which temporarily raised its policy rate to 500% in the early 1990s in a failed attempt to defend the krona.bitget

What Comes Next

The rate increase, effective September 24, takes borrowing costs to their highest since 1995 and marks another step in Japan's departure from decades of ultra-loose monetary policy. An economic adviser to Prime Minister Sanae Takaichi projected the BOJ would follow up with another hike by January, then revert to increases roughly once every six months.Reuters+2

For now, the gap between Japanese and U.S. interest rates remains wide enough to sustain carry-trade flows into the dollar, leaving the yen vulnerable despite the BOJ's tightening efforts.