BOJ Raises Rates to 1.25%: Can the Yen Push USD/JPY Below 155?

Key Takeaways

• The Bank of Japan raised its policy rate by 25 basis points to 1.25%, the highest level in 31 years.
• The yen weakened after the widely expected decision, pushing USD/JPY toward 157 as traders waited for guidance from Governor Kazuo Ueda.
• The Federal Reserve’s latest rate increase leaves the US-Japan interest-rate gap wide enough to preserve demand for yen-funded carry trades.
• A sustained move below 155 may require the BOJ to signal another near-term hike, US Treasury yields to decline or Japanese authorities to intervene again.

The Bank of Japan raised interest rates to their highest level since 1995 on Friday, but the widely anticipated decision failed to produce an immediate yen rally.

Instead, USD/JPY climbed toward 157 after the announcement, demonstrating that a higher Japanese policy rate alone may not be enough to overcome the dollar’s yield advantage. Investors are now focused on whether Governor Kazuo Ueda will signal a faster tightening cycle capable of pushing the currency pair below 155.

The outcome also highlights the unusual position facing currency markets: the BOJ and Federal Reserve raised rates during the same week, limiting the improvement in Japan’s relative interest-rate position.

BOJ Raises Its Policy Rate to a 31-Year High

The Bank of Japan increased its short-term policy rate by 25 basis points from 1% to 1.25% at the conclusion of its September 17–18 meeting.

The move continues Japan’s gradual withdrawal from decades of exceptionally loose monetary policy. The BOJ had previously raised rates in June before leaving them unchanged at its July meeting.

At 1.25%, the policy rate is now at its highest level in 31 years. The decision and supporting documents were published on the Bank of Japan’s monetary-policy page.

The central bank also warned that inflation could exceed its 2% target and acknowledged that renewed yen depreciation could increase domestic price pressures. A weaker currency raises the cost of imported fuel, food and raw materials, an especially important risk for an economy that depends heavily on overseas energy supplies.

Japan recorded a ¥1.1 trillion trade deficit in August, its fourth consecutive monthly shortfall. Imports increased 28% from a year earlier as higher oil prices raised the country’s energy bill, according to official data reported by the Associated Press.

These pressures strengthened the argument for another rate increase, even though parts of Japan’s domestic economy remain sensitive to higher borrowing costs.

Why Did the Yen Fall After the BOJ Rate Hike?

The yen initially weakened following the announcement, with USD/JPY rising toward 156.95. The counterintuitive reaction reflected the extent to which the decision had already been incorporated into currency prices.

A Reuters survey conducted before the meeting found that 66 of 68 economists, or 97%, expected the BOJ to raise rates to 1.25%. The hike therefore delivered almost no positive surprise for the yen. The Reuters poll published by CNA showed that investors were already looking beyond September to the timing of the next move.

The immediate market reaction resembled a “buy the rumour, sell the fact” event. Traders who had purchased yen before the meeting took profits once the expected increase was confirmed.

USD/JPY rose close to 157 despite the decision, while short-term technical momentum shifted back in favour of the dollar. FXStreet reported that the pair was trading around 156.88 shortly after the announcement.

The yen’s next move will depend less on the completed hike and more on how quickly the BOJ may raise rates again.

The Federal Reserve Is Limiting the Yen’s Recovery

The Fed’s September decision remains a major obstacle to a sustained yen rally.

On September 16, the US central bank raised its target range by 25 basis points to 3.75%–4%, its first increase since 2023. Policymakers also indicated that another rate increase could occur before the end of 2026.

Using the midpoint of the Fed’s range, US short-term rates remain approximately 2.6 percentage points above the BOJ’s new 1.25% policy rate. That gap continues to encourage investors to borrow in lower-yielding yen and invest in higher-yielding dollar assets.

The BOJ hike narrowed the differential created by the Fed’s move two days earlier, but it did not fundamentally reverse the dollar’s yield advantage.

Higher US Treasury yields add to the pressure. If markets continue pricing another Fed increase in December, USD/JPY may struggle to move sustainably lower even if the BOJ remains on a gradual tightening path.

This explains why the yen weakened despite Japan’s historically significant rate increase. Both central banks are tightening, and the Fed continues to offer a substantially higher return.

Can USD/JPY Break Below 155?

A move below 155 remains possible, but the BOJ may need to deliver stronger guidance than the market currently expects.

The first requirement would be a clear signal that another Japanese rate increase could arrive in October or December. A move to 1.50% before year-end would narrow the interest-rate gap and challenge expectations that the BOJ will continue tightening only slowly.

Lower US yields would also help. If softer inflation or employment data reduces expectations for another Fed hike, the dollar’s relative advantage could weaken and place downward pressure on USD/JPY.

From a technical perspective, the main levels to watch are:

• 156.50: Immediate support near the 20-day exponential moving average;
• 155.00: The key psychological level referenced in the headline;
• 154.00: The next potential support area following a break below 155;
• 152.89: The September low and a more significant bearish target;
• 157.00: Immediate resistance following the post-decision rebound;
• 157.75: An area close to the 200-day moving average.

A daily close below 155 would suggest that the BOJ’s tightening path is beginning to outweigh the remaining US yield advantage. A sustained move above 157, however, would weaken that argument and expose the pair to a return toward 158 or higher.

How High Could BOJ Interest Rates Go?

Economists increasingly expect the BOJ to raise rates more quickly than previously anticipated.

In the Reuters survey, 89% of analysts expected the policy rate to reach at least 1.50% by the end of March 2027. Approximately 62% expected rates to reach at least 1.75% by the end of the second quarter.

Half of the economists who provided a terminal-rate estimate selected 1.75%, while 40% believed the BOJ could ultimately raise rates to 2% or higher.

The case for additional tightening is supported by rising wages and persistent inflation expectations. Real wages increased 2.4% from a year earlier in July, marking a seventh consecutive monthly gain. Japan’s second-quarter GDP was also revised higher to an annualized growth rate of 1.4%.

However, the BOJ must balance inflation risks against weak areas of domestic demand. Consumption was flat during the second quarter, while business investment declined. Raising rates too rapidly could increase pressure on households, companies and the government’s large debt burden.

Ueda’s description of 1.25% will therefore be crucial. If he continues to characterize monetary conditions as accommodative, markets may infer that several more increases remain possible. A strong emphasis on uncertainty and data dependence would instead suggest a slower path.

Currency Intervention Remains a Risk Above 157

Japanese authorities have already demonstrated a willingness to intervene directly in the foreign-exchange market.

The Ministry of Finance spent a record ¥15.4 trillion, approximately $96.5 billion, supporting the yen between July 30 and August 26. The operation included rare coordinated action with the United States after USD/JPY approached 164.

The intervention initially pushed the pair as low as approximately 155.20, but part of that move was subsequently reversed. The limited durability of the operation demonstrated that intervention can alter short-term price action without eliminating the interest-rate differential driving yen weakness. Reuters’ report on the intervention

A renewed rise toward 160 would probably increase official concern, particularly because a weaker yen raises energy costs and imported inflation. However, officials may tolerate movement around 156–157 if the market remains orderly.

The risk of intervention could still discourage traders from building large short-yen positions, especially during periods of reduced liquidity.

What Comes Next for USD/JPY?

Governor Ueda’s policy guidance is now more important than the rate increase itself.

A firm commitment to further tightening could reverse the yen’s initial decline and bring 155 back into focus. A cautious message may allow USD/JPY to remain above 156 as investors continue to favour the dollar’s higher yield.

The pair will also remain sensitive to US data and Fed expectations. Strong US economic figures would reinforce the possibility of another rate increase and support the dollar. Softer inflation or employment data could lower Treasury yields and give the yen a stronger opportunity to recover.

Japan’s inflation, wage growth and government spending plans will shape the domestic side of the outlook. Energy prices will be particularly important because higher oil costs simultaneously increase Japanese inflation and weaken the country’s trade balance.

The BOJ has taken a significant step by lifting rates to a 31-year high, but the post-meeting reaction shows that one increase is not enough to resolve the yen’s structural weakness. USD/JPY may need a clearly faster BOJ tightening cycle, lower US yields or renewed intervention before it can establish a sustained break below 155.