The turning point of the yen's rise and fall: How will the exchange rate trend evolve in 2026?

In November, the Japanese yen hit a new low against the US dollar, with USD/JPY falling below 157. The recent yen weakness has persisted for more than half a year. However, market sentiment is quietly shifting — institutional forecasts, central bank attitudes, and technical signals are all pointing in the same direction: the yen may be approaching a reversal opportunity.

Why has the yen been in a long-term decline? Three fundamental reasons

The continuous depreciation of the yen fundamentally stems from imbalances across three levels.

First is interest rate differentials. The Federal Reserve has aggressively raised interest rates during high inflation, while the Bank of Japan maintains an accommodative policy. This large interest rate gap leads investors to borrow low-yen funds to buy high-yield dollar assets, further pushing down the yen’s value.

Second is diverging economic policies. The Japanese government favors active fiscal stimulus, coupled with a lagging pace of monetary tightening by the central bank, raising concerns about Japan’s fiscal sustainability. Meanwhile, the US economy remains relatively strong, widening the divergence in economic outlooks.

Third is self-reinforcing market expectations. Large-scale arbitrage trading has increased yen selling pressure, intensifying the depreciation trend. The momentum generated by this one-way trading is difficult to reverse in the short term.

How institutions view the 2026 outlook for the yen

Morgan Stanley’s latest research highlights a key turning point: the current USD/JPY exchange rate has already deviated from fair value. As signs of slowing US economic growth become clearer, if the Fed begins a rate cut cycle, the yen could see significant appreciation.

The bank forecasts that the yen may appreciate close to 10% against the dollar in the coming months. More importantly, it believes that as US Treasury yields decline, the deviation from fair value will be corrected in the first quarter of 2026, with USD/JPY expected to fall to around 140.

This means that returning from the current level of 157 to below 150 is no longer a pipe dream.

Key factors determining short-term yen fluctuations

To judge when the yen will stop falling, four key variables should be monitored:

The Bank of Japan’s policy signals are most critical. BOJ Governor Ueda Kazuo recently stated in Parliament that the central bank must closely monitor the risks of yen depreciation raising import costs. This has been widely interpreted as a prelude to rate hikes. If the BOJ clearly signals a rate increase at the December policy meeting, the yen will receive direct support.

Expectations of Fed rate cuts are equally important. Evidence of US economic slowdown is mounting, and market expectations for a Fed rate cut have increased. Any escalation in rate cut expectations will strengthen the yen.

Japanese authorities’ currency market interventions serve as a deterrent. The Japanese Finance Minister recently issued the strongest warning since 2022 about yen depreciation, significantly raising expectations of official intervention. Even without actual intervention, this deterrence can influence market sentiment.

Technical support levels. If USD/JPY falls back to around 156.70 and finds support, but breaks below 150, it could trigger a technical acceleration of decline, with targets toward 150 or even lower.

Who is shaping the future of the yen?

The yen’s movement is ultimately driven by the following factors:

1. Global inflation trends — If inflation remains high, central banks will tend to keep interest rates elevated, which is unfavorable for the yen in the short term; but if inflation continues to decline, the BOJ’s rate hike expectations will weaken.

2. Economic growth in various countries — Stronger data such as Japan’s GDP and PMI can create room for yen appreciation. Currently, Japan’s economy remains relatively stable within the G7, representing a potential bullish factor.

3. Central bank rhetoric and policy adjustments — Every statement by Ueda Kazuo can be amplified by the media, directly impacting the yen’s short-term trend. The December BOJ meeting will be a key window.

4. International risk environment — The yen has safe-haven attributes; rising geopolitical risks can push the yen higher. But currently, the global situation remains relatively stable.

Why has the yen been under long-term pressure historically?

Over the past decade, the yen has experienced multiple major shocks:

In 2011, the earthquake and Fukushima nuclear disaster caused massive economic losses, forcing Japan to significantly increase oil imports, which weakened the yen.

In 2012, Shinzo Abe launched “Abenomics,” followed by unprecedented quantitative easing by the BOJ, injecting large liquidity into the market and directly pushing down the yen.

In 2021, the Fed announced tightening policies, while Japan’s low borrowing costs made it a primary source of financing for arbitrage trades, further accelerating yen depreciation.

Starting in 2023, although the BOJ has gradually adjusted its policy stance, the pace has been much slower than market expectations, and the yen’s depreciation trend has not been effectively reversed.

How should investors respond?

From a short-term trading perspective, it remains relatively prudent to short USD/JPY on rallies, with a risk control point at around 156.70. If Japanese authorities intervene or the BOJ confirms a rate hike path, the exchange rate could gap downward sharply.

From a medium-term allocation perspective, returning the yen to a reasonable level has become a market consensus. Investors with travel needs can gradually position in yen; those involved in forex trading should develop plans based on their risk tolerance and seek professional advice when necessary.

In short, the logic behind the yen’s rise or fall has shifted from “why it’s depreciating” to “when it will appreciate.” This turning point is expected in the first half of 2026.