Will the Japanese Yen fall again? 2026 Exchange Rate Trends and Investment Opportunities Analysis

The most pressing question in the market is: Will the yen fall again? Since entering 2026, the USD/JPY exchange rate has continued to weaken, reaching a low of 159.454. What does this trend reflect? Is there a possibility for the yen to stop falling in the future? These questions are directly related to investors’ trading decisions.

Current Dilemma: Why Is the Yen Continually Under Pressure?

Entering 2026, the performance of the yen against the dollar has been disappointing. On January 14, the USD/JPY broke through key levels in the European and American forex markets, climbing to a high of 159.454 yen per dollar. Although Japanese Finance Minister Shunichi Suzuki and Financial Secretary Kanda Makoto made multiple statements to curb yen depreciation, and Prime Minister Sanae Sato said they would “take all necessary measures” to address abnormal exchange rate fluctuations, these policy signals seem to have limited effect.

Notably, after joint statements from officials, the yen briefly rebounded. On January 23, the market saw the largest single-day gain in nearly six months, with USD/JPY falling from 159.225 to 155.741. However, by January 26, the yen recovered to around 154, only to fall again on January 27, indicating the rebound lacked strength. Market speculation suggests that Japan and the U.S. may have intervened in the currency markets, but even so, the overall downward trend of the yen has not been reversed.

Currently, USD/JPY remains high, with the market viewing 160 yen as a key psychological level—also the trigger point for multiple Japanese government interventions in 2024. The yen’s weakness is actually the result of a series of systemic factors stacking up.

Interest Rate Differentials and Arbitrage Trading: The Deep Roots of Yen Depreciation

The primary reason for the yen’s continued weakness is the persistent and difficult-to-narrowing interest rate gap between Japan and the U.S.. Although the Bank of Japan (BOJ) began raising interest rates in 2025, Japan’s rates remain far below those of the U.S. This large spread attracts a lot of arbitrage trading—investors borrow low-interest yen to buy higher-yielding dollar assets, creating significant yen selling pressure that outweighs buying.

More critically, market expectations for further BOJ rate hikes are quite cautious. Most anticipate that the BOJ won’t approach a 1% policy rate until mid-2026 or even later in the year. Meanwhile, the U.S. economy remains relatively resilient, with sticky inflation and no strong expectations for the Fed to cut rates soon. This means the U.S.-Japan interest rate gap could stay high for a long time, continuing to pressure the yen downward.

The second factor stems from Japan’s new government fiscal policies. Prime Minister Sato continues the “Abenomics” style, implementing large-scale fiscal stimulus measures to boost the economy and ease inflation. However, this leads to increased government debt issuance and rising fiscal deficits, raising concerns about Japan’s fiscal risk premiums and further weakening the yen.

Third, the U.S. economy remains relatively robust with persistent inflation, supported by the Trump administration’s strong dollar and tariff policies, which bolster the dollar index. As a low-yield currency, the yen is more easily sold in risk-on environments. Although the yen appreciated briefly in the first half of 2025 due to expectations of BOJ rate hikes, the trend was overtaken by dollar strength in the second half, pushing USD/JPY from the 140-150 range above 155-157.

Fourth, Japan’s economic fundamentals are relatively weak. Domestic consumption remains sluggish, GDP occasionally contracts, and import-driven inflation pushes up prices. While wages have increased somewhat, real purchasing power remains subdued. This causes the BOJ to be cautious about raising rates further, fearing that excessive tightening could harm economic recovery, thus slowing the rate hike pace and indirectly prolonging the yen’s weakness.

Central Bank Policy Shifts: Are the Measures Sufficient?

A deep analysis of BOJ policy adjustments is warranted. On March 19, 2024, the BOJ made a historic decision to end its 17-year negative interest rate policy, raising the policy rate from -0.1% to 0-0.1%. Markets should have welcomed this change, but in reality, the yen continued to weaken due to widening Japan-U.S. bond yield spreads.

Later, on July 31, 2024, the BOJ raised rates by 15 basis points to 0.25%, exceeding market expectations of a 10 basis point hike, causing significant volatility. The yen initially fell briefly, then surged for four days, but this rebound was quickly offset by large-scale yen carry trades closing out, even triggering global market shocks—such as a 12.4% drop in the Nikkei 225 on August 5.

In 2025, the situation evolved further. On January 24, the BOJ made a major policy shift, sharply raising the benchmark rate from 0.25% to 0.5%, marking the largest single rate increase since 2007. This move officially ended its ultra-loose monetary policy era, supported by core CPI rising 3.2% YoY in March and wage increases of 2.7% in fall 2024.

Since then, in six rate meetings (from January to late October), the BOJ kept rates steady at 0.5%. Ironically, the yen continued to weaken, with USD/JPY surpassing 150. Only on December 19 did the BOJ raise rates again by 0.25 percentage points to 0.75%—the highest level in about 30 years since 1995—marking its second rate hike of the year.

These policy moves reveal a key issue: The hawkish signals from the BOJ have been insufficient to reverse the yen’s weakness. Hitoshi Hoshino, head of Japan markets at Citigroup, bluntly states: “The yen’s weakness is driven by negative real interest rates.” Currently, Japanese government bond yields remain below inflation, creating a negative real interest rate environment. If the BOJ wants to reverse the yen’s depreciation, “there’s no other choice but to address this issue.”

How Do Global Institutions View the Yen’s Outlook?

Different international investment banks have markedly different outlooks for the yen. JPMorgan’s Japan FX strategist Junya Tanase is the most pessimistic on Wall Street, expecting the yen to fall to 164 by the end of 2026. He notes that Japan’s fundamentals remain weak, and this situation is unlikely to improve significantly next year. As markets gradually digest the prospects of rising interest rates in other major economies, the tightening effects of the BOJ will be relatively limited, and cyclical factors could even turn more adverse for the yen.

Meanwhile, Parisha Saimbi, a strategist for emerging Asian FX and rates at BNP Paribas in Paris, also expects USD/JPY to dip to around 160 by the end of 2026. She believes that the global macro environment next year will still favor risk appetite, which generally supports carry trades. Considering ongoing arbitrage demand, cautious BOJ actions, and potentially more hawkish Fed stance than expected, USD/JPY is likely to remain in a high range.

These two top global banks’ forecasts form a consensus range—suggesting the yen may continue under pressure in 2026, with USD/JPY fluctuating between 160 and 164, making a reversal in the short term unlikely.

Will the Yen Fall Again? Key Factors for Judgment

Investors assessing the yen’s future trajectory should focus on several variables:

First, the pace of BOJ rate hikes. The current policy rate is 0.75%. Market expectations for further hikes are cautious. The January 23, 2026, rate decision kept rates unchanged, reinforcing a wait-and-see stance. While the BOJ has signaled a gradual rate increase, the exact pace remains uncertain. Faster hikes would directly support the yen; stagnation would keep it under pressure.

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

Third, global risk sentiment. As a low-yield currency, the yen is often borrowed in risk-on environments to invest in higher-yield assets. If stock markets or other risk assets correct—say, due to trade tensions or geopolitical issues—carry trade unwinding could cause the yen to spike higher. Conversely, stable global risk appetite would continue to pressure the yen through capital outflows.

Fourth, Japanese economic data. Pay attention to core CPI, GDP, PMI, etc. If inflation continues to surprise on the upside, the BOJ may accelerate rate hikes; if growth slows, the BOJ will likely maintain easing, which is unfavorable for the yen.

The Long-Term Rebound of the Yen: Is It Possible?

While the yen faces multiple short-term pressures, in the longer term, the yen will eventually return to its fair value and end its prolonged decline. No currency can depreciate infinitely; extreme exchange rates will eventually trigger market self-correction.

Once perceptions of the BOJ’s rate hike path shift, or the U.S. economy clearly slows, or global risk sentiment shifts, the yen could rebound. Historically, the yen exhibits strong safe-haven characteristics—during crises or geopolitical tensions, investors tend to buy yen for safety. For example, after escalations in conflicts or geopolitical risks, the yen often surges against other currencies.

For investors with tourism or consumption needs, gradually building yen positions is a reasonable strategy. For those seeking to profit from forex trading, it’s essential to consider the above factors, align decisions with personal financial situations and risk tolerance, and consult professional advice to manage risks amid market volatility.