When will the Japanese Yen appreciate? The exchange rate reversal is imminent in 2026【Key Forecast for Yen Investment】

How much longer will the yen continue to fall? Against the backdrop of the USD/JPY breaking psychological barriers, investors are most concerned with when the yen will appreciate. The answer may be closer than you think.

Yen Depreciation for Half a Year, Breaking 157 to Reach New Lows

Since early 2025, the yen has experienced rollercoaster movements. The USD/JPY exchange rate, starting near 160 at the beginning of the year, briefly dropped to 140.477 on April 21, with the yen appreciating over 12% in three months. But the good times didn’t last; after May, the trend reversed, and by October, USD/JPY broke through 150, with November seeing a drop below 157, hitting a half-year low.

Two forces are competing behind this:

Concerns over fiscal policy: The Takashi Sano administration’s aggressive fiscal expansion has raised concerns among international investors about Japan’s debt sustainability.

Widening interest rate differentials fueling capital outflows: The Bank of Japan maintains low interest rates, while the Federal Reserve keeps rates high, leading to a continued expansion of the Japan-US interest rate gap, causing foreign capital to flow into USD assets.

Recently, Japan’s Finance Minister issued the “most severe warning ever,” pointing out abnormal phenomena of unidirectional and rapid market fluctuations. This is the strongest intervention signal since September 2022, and the market widely expects the Japanese government may directly intervene to stabilize the currency.

When Will the Yen Rise? Three Key Factors

The Bank of Japan’s policy is the decisive variable. To truly reverse the yen’s depreciation, the BOJ must send clear signals of normalizing monetary policy, most directly by announcing a timetable for rate hikes. As the December BOJ policy meeting approaches, market focus centers on: Will the BOJ raise interest rates? Will the Fed initiate a new round of rate cuts?

Fed rate cuts will become a catalyst for yen appreciation. Signs of slowing US economy are increasingly evident, and expectations for Fed rate cuts are rising. Once US rates decline, narrowing the Japan-US interest rate gap, the yen will gain significant support.

Technical analysis provides clear trading strategies. In the short term, adopting a “sell on rallies” approach for USD/JPY remains relatively safe, with a risk control level set at 156.70. If authorities intervene or the December BOJ signals a rate hike path, the exchange rate could plummet, with targets around 150 or even lower.

Institutional Outlook: 10% Yen Appreciation Expected by 2026

Morgan Stanley’s latest forecast offers hope. The bank believes that as the US economy slows and the Fed begins consecutive rate cuts, USD/JPY could appreciate nearly 10% in the coming months.

More importantly, the current USD/JPY rate has deviated from fair value. As US Treasury yields decline, this deviation is expected to be corrected in Q1 2026, leading to a significant drop in USD/JPY. Morgan Stanley estimates the pair could fall to around 140 yen early next year.

However, the bank also warns of risks: if the US economy recovers in the latter half of next year and re-ignites yen carry trades, the yen could come under renewed pressure.

Historical Perspective: Key Moments in BOJ Policy Shift

To understand when the yen will rise, look back at the BOJ’s decisions over the past three years:

March 2024: The BOJ ends negative interest rate policy, raising rates for the first time in 17 years to 0-0.1%. Market reaction is tepid, and the yen weakens due to widening interest rate differentials.

July 2024: Unexpectedly raises rates by 15 basis points to 0.25%, causing global market turbulence. The yen temporarily strengthens but soon cools off.

January 2025: Implements the largest single rate hike since 2007, raising rates to 0.5%, signaling the end of ultra-loose policy. Subsequently, the yen briefly hits a low of 140.876 for the year.

February to October 2025: The BOJ holds rates steady at 0.5%, but the yen continues to depreciate, with USD/JPY breaking through 150.

This history clearly shows: Rate hikes by the BOJ do not immediately cause the yen to rise; for a genuine appreciation, the Fed must also cut rates to reverse the interest rate advantage.

Four Key Indicators to Monitor for Yen Fluctuations

Investors aiming to predict when the yen will appreciate should focus on these four signals:

Inflation Data (CPI): Japan’s inflation remains at historically low levels. If inflation continues to rise, pressure on the BOJ to hike rates increases, strengthening the yen. Currently, Japan is one of the few developed countries with low inflation.

Economic Growth Data (GDP, PMI): Stronger GDP and PMI figures would give the BOJ more room to tighten, benefiting the yen. Japan’s economic growth remains relatively stable among G7 nations.

Central Bank Statements: Governor Ueda Kazuo’s comments can trigger market volatility. Recently, he emphasized caution about yen weakness and imported inflation risks, which is an important signal for rate hike expectations.

International Market Conditions: The policies of the Fed, ECB, and other central banks directly influence the yen’s strength. The yen also acts as a safe-haven asset; geopolitical risks tend to boost its value.

Long-Term Outlook: The Yen Will Return to Its Proper Level

Although short-term widening of the US-Japan interest rate gap and slow BOJ policy adjustments continue to suppress the yen, a new consensus is forming: current exchange rates may be oversold. Under the following three supports, a medium-term yen appreciation trend is initially established:

• Deterrence from Japanese authorities’ interventions
• Gradual shift of the BOJ toward a hawkish stance
• Weakening of the US dollar’s own trend

In the long run, the yen will eventually return to its rightful level, ending the persistent depreciation cycle. Analysts generally agree that if you have travel or consumption needs in Japan, consider buying in dips; if you are engaged in forex trading, evaluate your risk tolerance based on the above information and allocate positions accordingly.

The key point to remember: When will the yen rise? It depends on signals from the December BOJ policy meeting and the future direction of Fed interest rates. These two variables will determine whether the yen enters a genuine appreciation cycle in 2026.