USDJPY

18 September 2026, 10:05 UTC Chief Investment Office GWM Investment Research

BoJ more proactive, but not yet a paradigm shift CIO View: USDJPY Teck Leng Tan, CFA, Strategist, UBS AG Singapore Branch Constantin Bolz, CFA, Strategist, UBS Switzerland AG

• The BoJ delivered a 25bps rate hike to 1.25%, but the combination CIO Forecast- USDJPY Sideways long term trend of a split vote and Governor Ueda's balanced messaging fell short of signaling an aggressive tightening cycle. 18 Sep 26 158.00 PPP*: 95.0 Dec 26 160.00 TEEER*: 87.0 • We view the BoJ's increasingly proactive normalization stance as sufficient to limit further yen weakness, making a sustained move Mar 27 158.00 above USDJPY 160 more difficult, but not enough to trigger a durable Jun 27 158.00 yen appreciation. Sep 27 158.00

• Our base case remains for USDJPY to trade sideways rather than for a Refinitiv, Macrobond, UBS calculation. *Purchasing Power structural yen recovery. We maintain our forecasts at 160 (Dec 2026) Parity (PPP) is not a forecast per se, but a long-term and 158 (Mar-Sep 2027). equilibrium value for an exchange rate, calculated by UBS, TEEER refers to the 'trend-extrapolated equilibrium exchange rate', which is a three-year PPP projection.

The Bank of Japan (BoJ) raised its policy rate by 25bps to 1.25% at its September meeting, in line with expectations. The immediate reaction in Speculative JPY positioning has turned USDJPY was a knee-jerk rise from 156.1 to as high as 157.3. We attribute net-long, which makes the yen prone the initial yen weakness to two factors: 1. The decision was not unanimous, to renewed weakness should yen carry with two (out of nine) board members voting to leave rates unchanged; trades re-emerge and 2. some market participants had speculated about a larger 50bps hike, Weekly data which ultimately did not materialize.

Subsequently, during Governor Ueda's press conference, USDJPY gyrated between 156.5 and 157.3 as he delivered a mix of hawkish and dovish messages.

Key hawkish comments included: • "Japan's monetary policy has entered a new phase." • "Policy decisions will be made after thorough debate at every meeting." • "It is now crucial to stabilize inflation around the 2% target." Source: Bloomberg, UBS, as of September 2026 • "The BoJ should act pre-emptively to prevent inflation from overshooting its objective."

However, the impact of these hawkish remarks was tempered by a series of dovish comments, including: • "We need to avoid rapid rate hikes that could trigger asset price volatility."

• "Rate hikes do not necessarily have to be slow, but the pace must be appropriate."

• "The terminal rate is difficult to determine." • "Future rate decisions will be based on an assessment of risks in both directions."

This report has been prepared by UBS AG Singapore Branch, UBS Switzerland AG. Please see important disclaimers and disclosures that begin on page 3.

• "It will take time to confirm that 2% inflation is sustainably USDJPY has deviated from yield entrenched." differentials since last October, partly • "We need to monitor the cumulative impact of rate hikes on financial driven by fiscal concerns conditions." Lingering fiscal concerns implies that USDJPY might not fully converge toward yield differentials Our key takeaway is that the BoJ has clearly become more proactive in its policy normalization efforts. However, this does not amount to a genuine paradigm shift toward an aggressively hawkish policy stance, in our view.

How does this affect our USDJPY view? We believe the BoJ's more proactive approach should be sufficient to contain further yen weakness, making a sustained break above the 160 level more challenging. However, the absence of a more forceful policy shift, particularly one aimed at moving real interest rates decisively into positive territory, continues to limit the prospects for a durable yen recovery.

Against this backdrop, and following the hawkish FOMC outcome earlier Source: Bloomberg, UBS, as of September 2026 this week, we maintain our USDJPY forecasts at 160 for December 2026 and 158 for March, June, and September 2027.

Importantly, our point forecasts should not be interpreted as implying a smooth or linear…