The Japanese Yen exchange rate hits a historic low. Is there a chance to rebound in 2026?

The recent performance of the Japanese Yen has indeed been disappointing. It fell below 157 in November, hitting a six-month low and attracting widespread attention from global investors. Many are asking: Will the Yen continue to decline? Is now a good time to buy Yen for investment? This article will analyze the underlying logic of the Yen exchange rate to help you understand possible future trends.

Why is the Yen stuck in a continuous depreciation cycle?

To understand Japan’s current predicament, we must fundamentally recognize four main drivers:

1. The persistent US-Japan interest rate differential

Although the Bank of Japan is gradually raising interest rates in 2025, Japan’s rates remain far below those of the US. This creates a continuous arbitrage mechanism: investors borrow low-interest Yen and invest in higher-yield US assets, resulting in ongoing selling pressure. Even with the BOJ raising rates, market expectations for future moves remain cautious, limiting the Yen’s attractiveness.

2. The new government’s fiscal expansion policies

Since Prime Minister Sanae Takaichi took office in October 2025, she has continued the “Abenomics” style, launching large-scale fiscal stimulus plans. This has led to increased government debt and rising deficit risks. Markets worry about rising fiscal risk premiums, further pressuring the Yen.

3. The relative strength of the US dollar

The US economy remains relatively resilient, with sticky inflation. Coupled with the Trump administration’s strong dollar policy, the US dollar index continues to stay firm. As a low-yield currency, the Yen is more susceptible to being sold off in a global risk appetite environment. In the first half of the year, the Yen temporarily appreciated due to rate hike expectations, but in the second half, the dollar regained strength, dominating the market. USD/JPY surged rapidly from the 140-150 range to above 155-157.

4. Weak economic growth in Japan

Domestic consumption remains sluggish, GDP growth is unstable, and import inflation pushes up prices. These factors limit the BOJ’s room to raise interest rates. The central bank needs to balance inflation control and economic recovery, thus maintaining a cautious stance on rate hikes, indirectly prolonging the Yen’s weakness.

How do institutions view the Yen exchange rate in 2026?

Wall Street’s outlook on the Yen is becoming increasingly pessimistic. Several major investment banks have issued forecasts for 2026:

JPMorgan’s highly bearish outlook

Junya Tanase, head of FX strategy at JPMorgan, believes that by the end of 2026, USD/JPY could fall to 164. He points out that the Yen’s fundamentals are weak, and this situation is unlikely to see a fundamental turnaround entering 2026. As global economies finish their rate hike cycles, the effects of BOJ’s tightening will be relatively limited, and cyclical factors may even turn more unfavorable for the Yen.

BNP Paribas’ cautious forecast

Parisha Saimbi, a macro FX strategist at BNP Paribas, expects that by the end of 2026, USD/JPY will dip to 160. She analyzes that next year, the global macro environment is still expected to favor risk assets, which generally supports ongoing arbitrage trading. Considering the stubbornness of arbitrage demand, the cautious stance of the BOJ, and the possibility of a more hawkish Fed, the USD/JPY exchange rate is expected to remain high.

Key factors influencing Yen’s future movement

In the short term, whether the Yen can stop falling and rebound mainly depends on three core variables:

1. The BOJ’s policy stance and communication

The January 22-23 meeting will be a critical window. If Governor Ueda Shinji signals a more hawkish stance, such as announcing a clear rate hike path, it could narrow the US-Japan interest rate differential and help stop the Yen’s decline. Conversely, if the BOJ maintains dovish rhetoric or emphasizes economic risks, the Yen will continue to be under pressure.

2. The pace of narrowing the US-Japan interest rate differential

If the Fed cuts rates more quickly due to economic slowdown, a rapid narrowing of the differential will favor Yen appreciation. But if the Fed’s rate cuts are slow or the US economy remains resilient, the dollar’s strength will persist, and the Yen’s rebound will be limited.

3. Changes in global risk sentiment

The Yen is often borrowed in large amounts for arbitrage when market risk appetite is high, creating selling pressure. If stocks experience a significant correction or geopolitical risks escalate, unwinding arbitrage trades could trigger a rapid Yen appreciation. Conversely, if global markets remain stable and prosperous, capital outflows from Japan will continue, exerting downward pressure on the Yen.

The full context of BOJ policy evolution

Understanding Japan’s past helps predict its future. Let’s review key milestones from 2024 to now:

March 19, 2024 — End of negative interest rate era

The BOJ ended its negative interest rate policy, raising rates to the 0-0.1% range. This was the first rate hike since 2007, a 17-year gap. Theoretically, this should support the Yen, but markets reacted tepidly, and the Yen continued to decline due to widening interest rate differentials.

July 31, 2024 — Unexpected rate hike

The BOJ raised rates by 15 basis points to 0.25%, exceeding market expectations. After a brief dip, the Yen surged for four consecutive days and maintained an upward trend for over a month. However, this unexpected hike triggered large-scale arbitrage unwinding, causing turbulence in global markets, with the Nikkei dropping 12.4% on August 5.

September 20, 2024 — Pause in rate hikes

The BOJ decided to hold rates steady at 0.25%. Subsequently, USD/JPY rose less than 3%, signaling initial signs of Yen stabilization.

January 24, 2025 — Historic large rate hike

The BOJ made a major move, raising the benchmark rate to 0.5%, the largest single increase since 2007. This marked the official end of the ultra-loose monetary policy era. Stimulated by this, the Yen appreciated against the dollar, with USD/JPY falling from around 158 at the start of the year to about 150, and reaching a low of 140.876 on April 21.

January to October 2025 — Policy stagnation

In six meetings, the BOJ kept rates unchanged at 0.5%. During this period, the Yen continued to weaken, with USD/JPY breaking above 150 again.

December 19, 2025 — Another rate hike

The BOJ raised rates by 0.25 percentage points to 0.75%, the highest in nearly 30 years since 1995. Although this was the second hike of the year, market reaction was muted, and the Yen’s appreciation was limited, hovering around 156.

How should investors respond to Yen exchange rate changes?

Monitor inflation trends

Japan’s CPI directly influences the BOJ’s policy space. If inflation continues to rise, the BOJ will be forced to hike rates, which is positive for the Yen. If inflation falls back, the BOJ’s easing expectations will re-emerge, putting short-term pressure on the Yen. Currently, Japan remains one of the few countries with relatively low inflation globally.

Track economic data

Key indicators like GDP and manufacturing PMI reflect economic health. Strong data suggest more room for rate hikes, supporting Yen appreciation; slowing growth indicates the BOJ may need to maintain easing, which is negative for the Yen. Japan’s economic growth remains relatively stable among G7 countries.

Pay close attention to central bank statements

Governor Ueda Shinji’s comments often trigger market volatility. Hints about future policy paths tend to be amplified by media, directly impacting Yen movements.

Understand the international policy environment

Since exchange rates are relative, policies of other central banks matter too. If the Fed cuts rates first, the Yen will tend to appreciate; if multiple central banks hike simultaneously, the Yen may face downward pressure. Historically, the Yen has also served as a safe-haven asset—during crises, it often experiences buying surges.

Conclusion

Although the widening US-Japan interest rate differential and the slow pace of BOJ policy shifts make it difficult for the Yen to strengthen in the short term, in the long run, the Yen will eventually return to its fair value, ending its persistent decline. For friends traveling abroad, consider buying in installments to average costs; for investors seeking forex profits, it’s essential to consider the above analysis, align with your financial situation and risk tolerance, and consult professional advisors if necessary to manage risks and navigate market volatility.