BOJ Raises Rates to 31-Year High: Why Is the Yen Still Under Pressure?

The Bank of Japan (BOJ) has raised its policy interest rate to the highest level in around 31 years. However, the Japanese yen remained under pressure against the US dollar following the decision.

On September 18, 2026, the BOJ raised its policy rate by 25 basis points, from 1.00% to 1.25%. The decision passed by a 7–2 vote, bringing the policy rate to its highest level since the mid-1990s. The move marked another step in the BOJ's gradual shift away from its long-standing ultra-loose monetary policy.

Despite the rate increase, the yen did not strengthen significantly. Reuters reported that the currency was trading at around 156.85 per US dollar on September 21, following a decline of around 2% during the previous week.

The market response highlights an important aspect of foreign exchange markets: a higher interest rate does not automatically translate into a stronger currency.

BOJ Raises Interest Rates to 1.25%

Japan has maintained very low interest rates for many years.

This monetary policy environment contributed to the yen becoming widely used as a low-cost funding currency. Borrowing in yen could be combined with investments in assets denominated in currencies with higher interest rates, forming the basis of what is known as the carry trade.

Japan's economic environment has gradually changed, however.

Higher inflation has contributed to the BOJ's decision to move away from its previous ultra-loose monetary policy. The latest increase to 1.25% represents another step in this normalization process. Reuters reported that BOJ Governor Kazuo Ueda signalled that the central bank had entered a phase focused more closely on preventing inflation from moving above its target.

At the same time, the effect of BOJ policy on the yen also depends on monetary policy in other major economies, particularly the United States.

Fed vs. BOJ: The Interest Rate Gap Remains Wide

On September 16, 2026, the Federal Reserve raised the federal funds target range by 25 basis points to 3.75%–4.00%. The Federal Reserve stated that inflation remained elevated and that the policy decision was intended to support a return toward its 2% inflation goal.

The current policy rates can therefore be summarized as:

Japan: 1.25%

United States: 3.75%–4.00%

The difference between these rates is known as the interest rate differential.

Interest rate differentials are one of several factors considered in foreign exchange markets. When the interest rate available in one country is higher than in another, differences in potential returns between assets denominated in the two currencies can affect currency demand.

In the case of USD/JPY, the gap between US and Japanese policy rates remains substantial.

This helps explain why a BOJ rate increase has not necessarily resulted in an immediate or sustained appreciation of the yen.

Carry Trade Remains a Key Factor

The carry trade provides another way to understand the yen's role in global markets.

A carry trade generally involves borrowing in a currency with relatively low funding costs and allocating the funds to assets denominated in a currency with higher interest rates.

The yen has historically been used for this purpose because Japanese interest rates remained relatively low for an extended period.

A simplified example is:

Borrow yen → Convert into US dollars → Invest in US dollar-denominated assets

The attractiveness of such a strategy depends partly on the interest rate difference and movements in the exchange rate.

If the funding currency appreciates significantly, exchange-rate losses can offset or exceed the interest-rate differential.

As a result, changes in expectations surrounding BOJ policy can affect carry trade positioning.

Reuters reported in September that expectations surrounding Japanese monetary policy had contributed to changes in carry trade positioning.

This relationship also helps explain why the yen can respond differently to a rate increase depending on how the decision compares with market expectations and monetary policy elsewhere.

Why Did the Yen Remain Under Pressure?

Several factors help explain the yen's response.

First, markets are assessing the pace of future BOJ policy normalization.

Although the BOJ raised its policy rate to 1.25%, two policymakers opposed the decision. Reuters reported that the lack of a clear signal regarding the timing of another increase contributed to the yen's weakness following the announcement.

Second, the Federal Reserve has also moved toward tighter monetary policy.

With the US policy rate at 3.75%–4.00%, the interest rate differential between the United States and Japan remains relatively wide.

Third, broader market conditions can also affect currency movements.

Changes in inflation expectations, government bond yields, economic data, and geopolitical developments can all influence foreign exchange markets.

This means that the yen's movement cannot be explained by BOJ policy alone.

Instead, the market response reflects the interaction between Japanese monetary policy, US monetary policy, economic data, and broader financial conditions.

USD/JPY Remains in Focus

USD/JPY represents the number of Japanese yen required to purchase one US dollar.

As a result:

A higher USD/JPY rate = a weaker yen relative to the US dollar

A lower USD/JPY rate = a stronger yen relative to the US dollar

USD/JPY D1 Chart (Tradingview)

Following the BOJ decision, USD/JPY moved toward the 158 area before later trading closer to 156.

Reuters reported USD/JPY at around 156.85 on September 21, after the yen had declined around 2% during the previous week.

The movement illustrates how exchange rates can respond to several factors at the same time.

The BOJ rate increase was a significant policy change, but the market continued to assess the difference between Japanese and US interest rates, future policy expectations, and broader financial conditions.

Scalping & Day Trade and USD/JPY Volatility

USD/JPY can experience periods of increased volatility around major economic events, including BOJ and Federal Reserve policy decisions, inflation releases, employment data, and changes in interest rate expectations.

This makes USD/JPY a relevant example when discussing Scalping & Day Trade from an educational perspective.

However, higher volatility does not necessarily indicate easier trading conditions.

Central bank announcements and economic data can produce rapid price movements within short periods. Such movements can also increase exposure to risks associated with sudden price changes, wider spreads, and execution differences.

In the context of short-term trading, understanding the economic calendar and factors behind short-term volatility can form part of a broader discussion of market risk.

The relationship can be illustrated through several scenarios:

BOJ policy decision → Changes in Japanese interest rate expectations

Fed policy statement → Changes in US interest rate expectations

Inflation data → Changes in expectations for future monetary policy

These changes can affect USD/JPY, although the magnitude and direction of any market reaction depend on the data, prior market positioning, and other concurrent factors.

Conclusion

The BOJ's decision to raise its policy rate to 1.25% represents another step away from Japan's long period of exceptionally low interest rates.

However, the yen remained under pressure following the decision.

One factor is the continuing interest rate gap between Japan and the United States. The BOJ's policy rate is now 1.25%, while the Federal Reserve's target range stands at 3.75%–4.00%.

The response also reflects expectations surrounding future BOJ policy, carry trade positioning, US monetary policy, and broader market conditions.

USD/JPY provides an example of how central bank decisions and economic data can contribute to short-term volatility in short-term trading environments. At the same time, rapid price movements can increase market risk, making risk awareness an important part of understanding such conditions.

Overall, the yen's recent movement demonstrates that exchange rates are influenced by multiple factors rather than a single interest rate decision.

The key question for markets is therefore not simply whether the BOJ will raise rates again, but how Japanese monetary policy evolves relative to US monetary policy and how financial markets respond to those changes.

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Source : 

BOJ raised its policy rate 

Federal Reserve