Citi: Yen Weakness Could Lead Bank of Japan to Hike Three Times by 2026

The Bank of Japan may raise interest rates three times in 2026 if the yen remains weak, according to Citigroup Inc.'s markets head. The central bank could lift the overnight call rate to 1% in April if the dollar rises above ¥160, with further hikes likely in July and possibly at year-end. Hoshino attributes the yen's weakness to negative real interest rates, where yields remain below inflation.

Japanese officials are increasingly focused on the yen's effect on inflation, particularly as businesses begin passing higher costs to consumers. A weaker yen may encourage faster rate hikes as the Bank of Japan seeks to address inflationary pressures. Economists generally expect one hike every six months, with most anticipating the next move in July.

Citigroup's forecast is more hawkish than the consensus, with USD/JPY levels above 160 seen as a potential catalyst for earlier action. Hoshino suggests the yen could trade within a range of ¥150 to ¥165 this year, based on current trends.

Why the Move Happened

The yen's weakness is driven by negative real interest rates, where yields are below inflation. This dynamic has pressured the currency and raised concerns among policymakers. The Bank of Japan has already raised rates in December but the yen continued to weaken, reaching an 18-month low earlier this week.

The weak yen is boosting exports but also increasing the cost of imports, raising inflation concerns for households. Citigroup analysts suggest that domestic institutions may begin reallocating capital back to Japanese fixed-income assets if yields exceed inflation.

How Markets Responded

The yen gained slightly after hitting an 18-month low following warnings from officials about excessive currency moves. Japanese Finance Minister Satsuki Katayama emphasized the need for appropriate action against further yen depreciation.

The U.S. Treasury also called for sound monetary policy formulation to address exchange rate volatility. These developments indicate growing international attention on the yen's trajectory and its implications for global markets.

What Analysts Are Watching

Analysts are monitoring the Bank of Japan's upcoming policy decisions and the yen's behavior against the dollar. If the yen remains below ¥160, the central bank may accelerate its rate hikes. Citigroup's Hoshino anticipates a potential third rate hike by year-end, depending on the yen's direction.

Traders are pricing in a 90% chance of a second hike by December, according to swaps market data. The next BOJ policy decision is scheduled for January 23, with officials likely to maintain the current rate at 0.75% for now.

Market participants will watch for further policy signals from the central bank, particularly regarding the pace of normalization. The yen's performance will be key to determining whether the BOJ follows a faster or more gradual path in 2026.