Fitch Ratings said on Wednesday that further appreciation in the Japanese yen is likely to depend on the Bank of Japan raising interest rates, pushing back against the widely held assumption that yen strength is primarily driven by narrowing policy divergence between the Federal Reserve and the BOJ.

The ratings agency said the yen's recent weakness does not appear to be driven mainly by the relative stances of US and Japanese monetary policy, a view that challenges the conventional narrative linking yen moves closely to shifts in Fed rate expectations. Instead, Fitch's assessment suggests that other structural or flow-based factors may be playing a larger role in the currency's trajectory.

The BOJ ended eight years of negative interest rates in March 2024 and raised its policy rate again in July, marking the most significant steps toward monetary policy normalization in Japan in over a decade. Yet the yen's trajectory has remained volatile, swinging between multi-decade lows and sharp rallies, including a rapid appreciation episode in August that triggered a global unwinding of carry trades. Fitch's analysis suggests that even these moves may reflect factors beyond the simple US–Japan rate spread that most models emphasize.

Fitch's comments add a note of caution to the growing consensus that yen strength is largely a function of narrowing US–Japan rate differentials. The agency's framing implies that markets may be overestimating how much further appreciation is achievable without concrete BOJ action. If yen weakness has not been primarily driven by relative monetary policy stances, structural or flow-based factors — such as Japan's persistent trade deficits, overseas investment repatriation patterns, or hedging behavior by institutional investors — could be limiting the currency's upside even as Fed rate expectations shift.

The assessment could temper some of the more bullish yen forecasts currently circulating and places additional focus on the BOJ's actual policy decisions, rather than simply the direction of US rates, as the key variable for currency traders to monitor. BOJ Governor Kazuo Ueda has signaled that further rate hikes are possible if the economy and inflation evolve in line with the bank's outlook, though the timing and pace remain uncertain. Without concrete rate hikes from Japan's central bank, Fitch suggests the yen may struggle to sustain meaningful further gains regardless of how US policy evolves.

Separately, BofA cuts year-end dollar/yen forecast to 149 after intervention.