Yen Exchange Rate Trend Analysis for 2026: The Battle Between Rate Hike Expectations and Depreciation Pressure

Will the Japanese Yen Continue to Weaken? When Will the Yen Exchange Rate Stop Falling? Since 2025, the Japanese Yen has experienced intense volatility, from its historic highs at the beginning of the year to its ongoing depreciation now. This reflects deep market restructuring driven by diverging global central bank policies and widening interest rate differentials. This article systematically analyzes the logic behind the Yen’s exchange rate movements and outlines the key factors influencing investors.

The Three Main Drivers of Yen Depreciation

The continued weakening of the Yen is not accidental but the result of three forces acting together.

First, the widening US-Japan interest rate differential has become the dominant factor. The Federal Reserve maintains a high interest rate policy, while the Bank of Japan’s rate hikes lag significantly behind. The substantial policy divergence causes ongoing capital outflows from Japan. Whenever the Fed signals a “hawkish” stance, the Yen tends to fall; conversely, it may rebound when the Fed signals dovishness. This relative relationship has become the most important short-term variable in Yen movements.

Second, concerns over Japan’s fiscal situation have heightened market doubts. The new government’s active fiscal spending policies have raised fears among foreign investors about Japan’s long-term fiscal sustainability. The market generally believes that worsening fiscal signals will further increase the long-term risk premium on Japanese bonds, which could accelerate Yen depreciation.

Third, global risk aversion sentiment fluctuates repeatedly. Although the Yen has historically been a safe-haven currency, the current large-scale “Yen carry trade” means rising risk aversion could trigger massive unwinding, leading to short-term sharp fluctuations in the Yen. This technical factor cannot be ignored in Yen trend analysis.

2025 Yen Exchange Rate Review: From Appreciation to Depreciation

In the first half of 2025, the Yen experienced a brief appreciation window. The USD/JPY exchange rate fell from nearly 160 at the start of the year to 140.477 on April 21, appreciating over 12% in three months, creating a significant bullish rally. Market sentiment was optimistic, believing that the Bank of Japan’s rate hike signals and normalization policies had taken effect.

However, this momentum was short-lived. After May, Yen appreciation gradually lost steam. The reason was that the Fed maintained high interest rate expectations supported by economic data, while the Bank of Japan kept rates unchanged at 0.5% in consecutive meetings from June to October. This policy expectation divergence caused the USD/JPY to accelerate upward after October.

In November, the situation worsened further. USD/JPY broke through 150, 155, and finally fell below 157 in mid-November, hitting a new low for the half-year and shocking global financial markets. Market pessimism reached new heights, with short Yen positions increasing continuously.

Central Bank Policy Shift: The Difficult Path of Rate Hikes

After the Bank of Japan announced the end of its negative interest rate policy in March 2024, the much-anticipated “normalization” process faced major setbacks in 2025.

Key timeline review:

In March 2024, the BOJ raised rates for the first time by 10 basis points to 0-0.1%; in July, it raised again by 15 basis points to 0.25%, exceeding expectations and triggering global financial turbulence, including a 12.4% plunge in the Nikkei 225 on August 5. This “Yen carry trade unwinding storm” left a deep lesson for markets.

On January 24, 2025, the BOJ made a major decision—raising rates to 0.5%, the largest single hike since 2007. This was seen as a clear signal that the era of easing was ending, fueling market expectations of Yen strength.

However, unexpectedly, from January to late October 2025, the BOJ held rates steady at 0.5% across six meetings. This “wait-and-see” stance, contrasted with market expectations, directly contributed to the Yen’s continued depreciation.

Institutional Forecasts: The Mid-term Strengthening Logic of the Yen

Although the Yen remains in a depreciation trend, mainstream analysts in Wall Street and London have reached a surprising consensus: the Yen is already significantly oversold, and a medium-term rally is now a certainty.

Morgan Stanley’s latest research report states that as US economic slowdown signs become clearer, the Fed will likely start a rate-cut cycle. Under this scenario, the USD/JPY exchange rate is expected to appreciate by nearly 10% in the coming months. The report further notes that USD/JPY has deviated substantially from its fair value, and as US Treasury yields fall, this deviation is expected to correct in the first quarter of 2026.

Based on this outlook, Morgan Stanley predicts USD/JPY will fall back to around 140 yen early next year, marking a phase reversal for the Yen. The report emphasizes that, although Japan’s domestic fiscal policy shows no clear signs of expansion, external factors—especially the Fed’s policy direction—will be the decisive variables in determining the exchange rate trend.

Key Points to Watch for Yen in 2026

Forecasting the Yen’s future requires close monitoring of these four major factors:

First, inflation data trends. Japan’s current inflation remains relatively low globally, with core CPI around 2%. If inflation continues to rise, the BOJ will be forced to accelerate rate hikes, supporting Yen appreciation; if inflation falls back, the BOJ may remain on hold, maintaining Yen depreciation pressure.

Second, changes in economic growth momentum. Pay close attention to Japan’s GDP and leading indicators like PMI. Strong economic data will give the BOJ more policy adjustment room, and vice versa. Currently, Japan’s growth is relatively stable among G7 countries, but whether this stability can persist remains to be seen.

Third, signals from BOJ Governor Ueda Kazuo. As a key market figure, each of his public statements can be amplified by media and influence Yen movements in the short term. Recently, his warnings about Yen’s weakness raising import costs have been interpreted as potential rate hike signals.

Fourth, the synchronized evolution of global central bank policies. The policy directions of major central banks like the Fed and ECB ultimately determine the relative stance of each country’s monetary policy. If the world enters a rate-cut cycle, the Yen will have a golden window for appreciation.

Technical Analysis and Risk Alerts

From candlestick patterns, USD/JPY still has room to break higher, but upward momentum is gradually weakening. In the short term, a “buy on dips” strategy remains relatively prudent, with risk control points around 156.70. If this level is effectively broken downward, it could trigger a larger cliff-like decline, with targets possibly near 150 or lower.

Risks to watch include: sudden intervention by Japanese authorities, a clear rate hike path established at BOJ meetings, or a sharp global risk asset sell-off that triggers a surge in Yen safe-haven demand—all of which could reverse Yen trends in the short term.

Investment Recommendations

For investors with Yen exposure, it is advisable to adopt a phased accumulation strategy based on thorough risk assessment and time horizon. Those with travel or consumption needs can buy small amounts on dips to meet future usage. For traders seeking profit from exchange rate movements, close monitoring of the four key factors and setting stop-loss levels are essential to avoid excessive losses amid volatility.

In any case, the Yen will ultimately return to its fair value, ending the current depreciation trend—it’s only a matter of time.