In late January 2026, Citigroup analysts predicted the Bank of Japan (BoJ) could hike rates up to three times in 2026 if the yen remains weak, potentially doubling the current policy rate to 1%, per CoinRank_io. Akira Hoshino, Citigroup’s head of Japan markets, stated that a USD/JPY break above 160 could prompt a 25 bps hike as early as April, followed by hikes in July and later, prioritizing currency stability over domestic growth, per. This marks a departure from Japan’s ultra-loose policy.
The yen’s weakness stems from deeply negative real interest rates, adjusted for inflation, creating downward pressure despite other central banks pausing or easing, per. Hoshino emphasized that without addressing this imbalance, verbal interventions won’t stabilize the yen, a view shared by global banks seeing currency defense as a catalyst for BoJ normalization, per. X posts from @FXDailyDigest highlight the yen’s role as a macroeconomic constraint.
Unlike U.S. or European hikes focused on inflation, BoJ tightening would recalibrate Japan’s global capital role, reducing yen-funded carry trades that fuel risk assets, per. A rate rise to 1%+ could trigger capital repatriation, raise funding costs, and increase volatility in bonds, equities, and emerging markets, per. Citigroup projects USD/JPY fluctuating between high-140s and mid-160s in 2026, reflecting U.S. policy uncertainty and BoJ’s conditional response.
Global investors face new risks from BoJ’s exchange-rate focus, where sudden yen moves could prompt action, boosting volatility across assets, per. Japan’s shift from an excess liquidity source to a global tightening contributor could reshape flows, per. X posts from @MarketWatchFX warn of impacts on leveraged strategies.
Citigroup’s analysis reveals shifting BoJ priorities, with exchange-rate credibility gaining over growth, signaling normalization driven by external pressures, per. A three-hike scenario in 2026 could mark a turning point, reshaping liquidity and challenging assumptions about Japan’s cheap capital role.
