Citibank expects the Bank of Japan to raise interest rates three times this year: How will the yen appreciation battle unfold

Citigroup Japan Market Business Leader Hoshino Akira recently stated that if the yen continues to depreciate, the Bank of Japan may raise interest rates three times this year, increasing the rate from 0.5% to 1%, effectively doubling the interest rate level. The logic behind this forecast is quite clear: the fundamental reason for the yen’s depreciation is negative real interest rates, and the central bank has no choice but to raise rates to reverse the exchange rate trend.

Central Bank Rate Hike Timeline Emerges

Hoshino Akira provided a relatively specific rate hike expectation:

This timeline is not unfounded. Hoshino believes that once the USD/JPY exchange rate breaks the key level of 160, the Bank of Japan may take action as early as April. If the yen remains weak, a second rate hike could occur in July. There may even be a third hike before the end of the year.

The Real Dilemma Behind Yen Depreciation

Negative real interest rates are the main culprit

Hoshino’s view gets to the heart of the issue: the yen’s weakness is driven by negative real interest rates. What does this mean? Simply put, when nominal interest rates are below inflation, real interest rates are negative, eroding returns on holding yen, and international investors will naturally sell yen to seek higher-yielding assets. The Federal Reserve’s high-interest-rate policy contrasts with this, making the dollar more attractive, and yen depreciation an inevitable result.

The Central Bank’s Forced Choice

Hoshino admits that if the Bank of Japan wants to reverse the exchange rate trend, “there is no choice but to solve this problem.” The implication is that rate hikes are necessary; without raising rates, yen depreciation will continue to worsen. This passive situation has a dual impact on the Japanese economy: on one hand, yen depreciation will increase import costs and intensify inflationary pressures; on the other hand, the central bank’s forced rate hikes will suppress domestic economic growth.

Exchange Rate Outlook and Market Impact

Yen’s activity range in 2026

Hoshino predicts that in 2026, the yen will fluctuate within a range slightly below 150 to 165. The lower end (around 150) is already close to historical lows, while the upper end (165) could be a new high that USD/JPY might reach. In other words, the yen this year faces oscillation within a low range, with limited rebound potential.

Potential Chain Reactions

Expectations of rate hikes by the central bank could have far-reaching market impacts. First, rate hikes will directly support the yen, but this support may come slowly. Second, rate hikes will increase financing costs for Japanese companies, especially those relying on low-interest-rate financing. Third, if the pace of rate hikes exceeds expectations, it could trigger stock market adjustments.

Summary

Citigroup’s three-rate hike forecast reflects the dilemma faced by the Bank of Japan: yen depreciation requires rate hikes to curb it, but rate hikes will also put pressure on the economy. This is not the central bank’s desired choice but a passive response forced by yen depreciation. The key is whether USD/JPY will truly break through the 160 trigger point; once it does, the central bank’s rate hike timetable will be activated. For market participants, close attention should be paid to the US-Japan interest rate differential, exchange rate trends, and the central bank’s actual actions—these three factors will determine the yen’s fate this year.