Will the Japanese Yen continue to fall? An in-depth analysis of the 2026 Yen exchange rate outlook

How will the recent performance of the Japanese Yen develop? Many investors are wondering whether the yen’s depreciation trend will continue. As we enter 2026, the yen remains volatile, with USD/JPY oscillating in a high range. What investment opportunities and risks are hidden behind this?

Bank of Japan Policy Shift: Why Is the Yen Still Difficult to Stop Falling?

From March 2024 to the end of 2025, the Bank of Japan (BOJ) undertook unprecedented policy adjustments. It ended its negative interest rate policy after 17 years, then in January 2025, sharply raised rates by 50 basis points to 0.5%, and in December, increased again by 25 basis points to 0.75%. Logically, this policy shift should support yen appreciation, but in reality—the yen continues to weaken.

The key is that, despite the BOJ’s sizable rate hikes, interest rates remain far below those in the U.S. Japan’s 0.75% policy rate is still extremely low among major economies, only slightly above Switzerland. This means borrowing yen for arbitrage remains attractive; investors continue to borrow low-interest yen and invest in higher-yield dollar assets, leading to persistent oversupply of yen.

According to the BOJ’s meeting minutes, on January 23, 2026, the BOJ maintained the policy rate at 0.75%, with market expectations for further rate hikes remaining cautious—generally expecting several months before the next move. This slow pace of rate hikes has further weakened the USD/JPY exchange rate, which once fell to 158.61 yen per dollar, nearing the 160 level.

The Truth Behind the U.S.-Japan Interest Rate Differential Expansion: The Fundamental Driver of Yen Depreciation

To understand why the yen continues to fall, we must clarify a core issue—the reason behind the widening U.S.-Japan interest rate gap.

First, the U.S. economy remains relatively resilient. The U.S. economy still shows strong growth momentum, with high inflation persistence, and the Federal Reserve remains cautious about cutting rates. Even if technical rate cuts occur, they are much slower than market expectations. This keeps U.S. interest rates high, widening the interest rate differential.

Second, Japan’s new government’s fiscal expansion policies. Since October 2025, Prime Minister Sanae Takaichi’s government has continued “Abenomics” style, launching large-scale fiscal stimulus. While aimed at boosting the economy, it also raises concerns about increasing government debt and fiscal deficits. Markets worry that fiscal risks could pressure Japanese government bond yields, further weakening the yen.

Third, Japan’s economic fundamentals remain relatively weak. Although Japan is not in recession like some countries, domestic consumption is sluggish, with some quarterly GDP figures showing negative growth. Imported inflation pushes prices higher, and while wages have increased, real purchasing power remains under pressure. This forces the BOJ to remain cautious about raising rates further, avoiding excessive tightening that could hinder economic recovery.

In short, the yen’s predicament isn’t due to a lack of policy resolve but stems from economic fundamentals and the relative gap with the U.S.

Three Key Variables for the Yen’s 2026 Trajectory

To predict whether the yen will continue to fall, investors should closely monitor these three factors:

First, real interest rates. JPMorgan’s Japan FX strategist Junya Tanase points out that the yen’s weakness is fundamentally driven by negative real interest rates. When government bond yields stay below inflation, real interest rates are negative. If the BOJ wants to reverse yen depreciation, the most effective way is to raise real interest rates—not just nominal policy rates. This requires either inflation falling or nominal rates rising, both of which are uncertain at present.

Second, the speed of narrowing the U.S.-Japan interest rate gap. If the Fed accelerates rate cuts due to U.S. economic slowdown, the gap could quickly narrow, supporting a yen rebound. Conversely, if the Fed’s rate cuts are slow or the U.S. economy remains resilient, the dollar will stay strong, limiting yen appreciation.

Third, global risk sentiment and arbitrage trading flows. As a low-interest-rate currency, the yen is often borrowed extensively for arbitrage when risk appetite is high. When global equities and risk assets rise, arbitrage activity suppresses yen appreciation. Conversely, if markets decline, unwinding arbitrage positions can cause rapid yen appreciation.

How Major Banks View the Yen: Institutional Forecasts Compared

Faced with uncertainty in yen movements, Wall Street’s major banks have issued their forecasts:

JPMorgan’s FX strategist Junya Tanase is the most pessimistic, predicting USD/JPY could reach 164 by the end of 2026. He believes the yen’s fundamentals remain weak, and this trend is unlikely to improve significantly, with cyclical factors possibly exacerbating yen depreciation.

BNP Paribas’ Emerging Asia FX and Rates Strategist Parisha Saimbi is less extreme, expecting USD/JPY to dip to around 160 by year-end. She notes that the macro environment remains relatively supportive of risk sentiment, and arbitrage demand may continue to keep the dollar strong against the yen.

Citi emphasizes the importance of real interest rates. They believe that unless the BOJ can effectively raise real rates, the yen will remain weak.

From these forecasts, it’s clear that the yen faces downside risks in 2026, but estimates of how much it could fall vary widely. The market agrees the yen may decline further, but opinions differ on the extent.

Complete BOJ Policy Record: How Japan Reached Its Current Situation

To truly understand the yen’s current predicament, it’s necessary to review the BOJ’s policy evolution over the past two years:

March 2024 marked the end of 17 years of negative rates, with the first rate hike. The subsequent 0.15% increase in July caused significant market turmoil and triggered large-scale yen arbitrage unwinding.

In January 2025, the BOJ made its largest single rate hike since 2007—50 basis points—supported by core CPI rising 3.2% YoY in March and wage increases of 2.7% in fall negotiations. After this, the yen appreciated from around 158 to over 140, showing short-term strength.

However, since January 2026, rate hike momentum has slowed markedly. The January 23 decision to hold rates steady reflects cautious outlooks on the economy.

Five Key Indicators Influencing the Yen’s Future

For investors wanting to gauge the yen’s direction, these five economic indicators are crucial:

Inflation Data (CPI)
Inflation directly influences BOJ rate decisions. Japan’s inflation remains subdued, well below the U.S. rate of over 3%. If inflation accelerates, the BOJ may be forced to hike faster, supporting the yen; if not, the yen may weaken.

Economic Growth Data (GDP and PMI)
GDP and PMI reflect economic health. Strong data give the BOJ room to tighten, boosting the yen; weak data suggest continued easing, weighing on the yen. Japan’s growth is relatively stable among G7 but not the strongest.

BOJ Statements and Forward Guidance
BOJ Governor Ueda’s comments are closely watched. Hawkish signals can strengthen the yen short-term, while dovish remarks may weaken it.

Global Interest Rate Environment
The policies of the Fed, ECB, and other major central banks influence the U.S.-Japan rate gap. Coordinated rate cuts globally could support yen appreciation.

Risk Asset Performance
Stock markets and commodities affect arbitrage flows. Rising risk assets tend to suppress yen, while declines can trigger yen rebounds.

What Yen Investors Should Watch

For those investing in yen, the current environment offers both risks and opportunities:

Risks:
Most forecasts suggest continued downside pressure, with potential for USD/JPY to break 160 or even reach 164 in the coming months. Large-scale arbitrage positions mean that a shift in risk sentiment could cause sharp yen movements.

Opportunities:
The yen’s weakness may present buying opportunities. For travelers planning trips to Japan, gradually purchasing yen at high rates can diversify costs. Professional investors can monitor the five key indicators to identify potential rebounds.

It’s important to remember that the yen has historically been a safe-haven currency. During major global risk events, the yen often appreciates rapidly. This makes it not only a forex trading instrument but also a hedge in diversified portfolios.

Summary

Will the yen fall further? Based on current fundamentals and policy trajectories, the short-term outlook suggests continued depreciation risk. The persistent U.S.-Japan interest rate gap, Japan’s relatively weak fundamentals, and large arbitrage flows all support a weaker yen. Pessimistic forecasts from major banks confirm this view.

However, in the long run, the yen will likely revert to its fair value. The BOJ’s gradual rate hikes, Japan’s ongoing economic challenges without crisis, and potential shifts in global risk sentiment mean that when positive changes occur, the yen could rebound swiftly.

For ordinary investors, it’s crucial to regularly monitor these key indicators, tailor strategies to risk tolerance and investment horizon, and seek professional advice when needed. Whether accumulating yen for travel or engaging in forex margin trading, understanding the underlying logic behind yen movements is essential for making rational decisions.