When Will the Yen Depreciation Cycle End? Central Bank Policies and the 2026 Exchange Rate Turning Point

The Japanese Yen has experienced intense fluctuations over the past two years, from appreciation to depreciation and then to expectations of stabilization. What does this behind-the-scenes movement truly reflect? Currently, the USD/JPY has broken through the psychological barrier of 157. Does this mean the Yen still has room to decline, or has it already reached its bottom?

A Decade of Yen Depreciation: From Disaster to Policy and Interest Rate Differentials

To understand the current trend of the Yen, we must review several key depreciation events over the past decade and their fundamental causes.

The 2011 Great Japan Earthquake was the trigger for the Yen’s first significant weakening. The earthquake and the Fukushima nuclear disaster led to energy shortages in Japan, increased import demand, and hindered exports, resulting in decreased foreign exchange income and Yen depreciation.

Deeper impacts stem from Prime Minister Shinzo Abe’s “Abenomics” launched in 2012. In April 2013, the Bank of Japan implemented an unprecedented large-scale asset purchase program, with new Governor Haruhiko Kuroda pledging to inject the market with the equivalent of $1.4 trillion. This ultra-loose monetary policy caused the Yen to depreciate nearly 30% over two years, despite positive stock market reactions.

2021 marked a turning point. The Federal Reserve announced tapering of monetary easing, while the Bank of Japan maintained extremely low borrowing costs. This interest rate differential attracted large-scale carry trades—investors borrowing Yen to invest in higher-yield assets. During this period of global economic recovery, the Yen faced maximum depreciation pressure.

Policy signal changes in 2023 were particularly critical. New BOJ Governor Kazuo Ueda signaled consideration of changing monetary policy. Meanwhile, Japan’s CPI rose above 3.3%, with core CPI exceeding 3.1%, reaching levels not seen since the 1970s oil crisis.

2024-2025: Accelerating Yen Depreciation and Reversal

March 19, 2024 marked a historic moment for the Bank of Japan. The BOJ announced the end of its negative interest rate policy, raising the benchmark rate to 0-0.1%, the first rate hike since February 2007—17 years ago. However, the market did not respond positively—the Yen continued to weaken due to widening US-Japan interest rate differentials.

A 15 basis point rate hike on July 31 exceeded expectations, causing the Nikkei 225 to plunge 12.4% on August 5. This rate increase triggered a large-scale unwinding of Yen carry trades, leading to a brief Yen decline followed by a sustained rally.

By 2025, the situation shifted significantly. On January 24, the BOJ announced a maximum single rate hike, raising the benchmark rate to 0.5%, reflecting increased concern over inflation—core CPI rose 3.2% YoY in March, and labor negotiations in autumn resulted in a 2.7% wage increase.

However, in the subsequent six meetings (from January to late October), the BOJ held steady. The benchmark rate remained at a historic low of 0.5%, and the Yen continued to weaken. USD/JPY fell from around 158 at the start of the year to 140.477 on April 21 (a gain of over 12%), then weakened again, falling below 157 in November to reach a new low for the second half.

BOJ Governor Kazuo Ueda recently signaled in parliamentary hearings that the central bank must be attentive to risks of Yen weakness raising import costs and prices. This was interpreted by markets as a clear signal that rate hikes or tightening measures could be on the table.

Deep Analysis of the Reasons Behind Yen Depreciation

The ongoing weakness of the Yen is driven by two core factors:

First, the widening US-Japan interest rate differential. The Federal Reserve maintains relatively high rates, while the BOJ has been slow to raise rates, with the current 0.5% benchmark far below US levels. This interest differential continues to attract capital flows into USD assets.

Second, concerns over the sustainability of Japan’s fiscal expansion policies. The Sanae Takaichi administration’s aggressive fiscal stimulus has raised worries about long-term government debt accumulation.

Additionally, the Yen’s role as a traditional safe-haven currency has diminished. During periods of rising global risk appetite, investors tend to borrow low-yield Yen to invest in higher-yield assets, creating carry trade pressures.

Market Outlook for 2026: Institutional Perspectives

Although the Yen faces short-term depreciation pressures, market consensus is gradually forming: the current exchange rate may already be oversold.

Morgan Stanley’s latest forecast offers a key reference. The bank believes that as signs of US economic slowdown emerge, if the Fed begins a series of rate cuts, the Yen could appreciate against the dollar by nearly 10% over the coming months. Based on the deviation of the dollar from its fair value, a Fed rate cut would lower yields, and USD/JPY could fall to around 140 in the first quarter of 2026.

From a technical perspective, USD/JPY still has upside potential, but key support is at 156.70. If Japanese authorities intervene or the December BOJ meeting signals a rate hike path, the exchange rate could plummet, with targets at 150 or even lower.

Morgan Stanley also warns of risks: if the US economy recovers in the second half of next year and carry trade demand resumes, the Yen could face renewed depreciation pressures.

Key Variables Influencing the Yen Exchange Rate

Investors need to monitor the following factors to assess Yen trends:

Inflation (CPI) data: Japan remains one of the world’s lowest-inflation countries. If inflation continues to rise, the BOJ will have stronger incentives to hike rates, which would support the Yen; if inflation cools, continued easing would weigh on the Yen.

Economic growth indicators: GDP and PMI are particularly important. Strong economic data suggest room for tighter monetary policy, which would be positive for the Yen. Japan’s economic growth remains relatively stable among G7 nations.

Central bank policies and statements: Ueda’s remarks can be amplified or misinterpreted by markets, impacting the Yen in the short term. The December rate decision will be a key event.

Global market environment: The policy directions of other central banks, especially the Fed, determine relative exchange rates. If global central banks enter a rate-cut cycle, the Yen could appreciate; otherwise, it may weaken. Historically, the Yen has served as a safe-haven during geopolitical crises—such as the escalation of the Israel-Hamas conflict, when the Yen surged in the short term.

Overall Outlook

The Yen’s depreciation cycle is not endless. Although short-term factors like widening US-Japan interest differentials and slow policy shifts limit the Yen’s gains, in the medium term, the Yen is expected to revert to its fair value. Market expectations for Yen appreciation in 2026 are already forming, with the key uncertainties being when the Fed will start cutting rates and how aggressively the BOJ will hike. The current exchange rate range of 155-157 could serve as a critical turning point, and investors should closely watch central bank signals and economic data changes.