Is the moment for the Japanese Yen exchange rate reversal approaching? 2026 Investment Layout Guide

Why Did the Yen Suddenly Plunge? Is Now the Time to Buy Yen for Profit? Over the past ten months, the performance of USD/JPY has shocked the market. From the 140 level at the end of 2024, it has climbed all the way above 157, facing the most severe depreciation cycle since the 1990s. What investment opportunities are hidden behind this exchange rate fluctuation?

The Yen at 34-Year Lows: What Are the Key Drivers?

Dual Forces Behind Yen Depreciation

The current yen remains weak, mainly due to two competing forces:

First, expectations of fiscal expansion within Japan. The Shinzō Abe administration’s aggressive budget spending policies have raised concerns about the sustainability of long-term debt, thereby dampening the attractiveness of yen assets.

Second, more critically, the divergence in monetary policies. The Federal Reserve maintains a tightening stance amid high inflation, while the Bank of Japan remains slow in its cycle. The policy interest rate differential between the two countries has reached a historic high, highlighting the USD’s advantage over the yen. This interest rate gap attracts large arbitrage flows from Japan to the US, becoming the main driver of yen depreciation.

In November, the USD/JPY exchange rate broke through the 157 mark, creating the lowest level since the early 1990s. Japan’s Finance Minister immediately issued a “record-strong warning,” marking the clearest government intervention signal on exchange rates since September 2022, reflecting deep concern from monetary authorities about the current situation.

Central Bank Policy Shift: The Turning Point for Yen Reversal

From Easing to Hawkish Turnaround

To understand the future trend of the yen, it is essential to analyze the trajectory of the Bank of Japan’s policies.

In March 2024, the BOJ ended its 17-year negative interest rate policy, raising the policy rate to the 0-0.1% range, marking the end of an era of easing. Although markets responded tepidly—widening the US-Japan interest rate differential further—this move was a milestone.

On July 31, the decision shocked markets again. The BOJ raised rates to 0.25%, a 15 bps increase, exceeding expectations. This unexpected rate hike triggered massive yen arbitrage unwinding, causing intense volatility in global financial markets, with the Nikkei 225 dropping as much as 12.4% in a single day on August 5.

Entering 2025, the BOJ made a major decision on January 24—raising the benchmark rate to 0.5%, the largest single hike since 2007. This decision was supported by two main factors: first, core CPI rising 3.2% YoY in March; second, autumn labor negotiations resulting in a 2.7% wage increase.

However, after nine meetings since the rate hike, the BOJ has maintained a hold, keeping the policy rate at the historic low of 0.5%. As a result, the yen continues to weaken, with USD/JPY already breaking through the 150 level.

BOJ Governor Ueda Kazuo recently stated during a parliamentary inquiry that the central bank needs to closely monitor the risks of yen weakness increasing import costs and overall inflation. This comment has been widely interpreted as a clear signal of policy tightening.

Key Factors Influencing Yen Movement

Three Major Variables Determining the Future Direction

1. BOJ’s Rate Hike Decisions

If the BOJ clearly signals a timetable for rate hikes, especially if the path is confirmed at the December policy meeting, the yen could see a sharp rebound. Technically, if USD/JPY falls below 156.70, further declines to 150 or lower are reasonable expectations.

2. Fed’s Rate Cut Progress

As signs of US economic slowdown become more evident, market expectations for the Fed to cut rates are rising again. If the December meeting confirms a rate cut path, it will be a strong catalyst for yen appreciation and a weakening of USD/JPY.

3. Inflation and Economic Data

Japan’s inflation remains relatively moderate, with GDP and PMI data showing resilience. If economic data weaken, the BOJ’s room to hike rates will be limited; if data continue to improve, it could support further tightening.

Institutional Forecast: Yen Returning to Fair Value

Morgan Stanley’s latest research indicates that as US economic slowdown signals become clearer, if the Fed initiates consecutive rate cuts, USD/JPY could appreciate nearly 10% in the coming months.

The bank’s analysis suggests that the current high level of USD/JPY has deviated from its fair value. As US Treasury yields decline, leading to valuation adjustments, this deviation is expected to correct in the first quarter of 2026. Based on this, Morgan Stanley forecasts USD/JPY will fall to around 140 early next year.

However, the report also warns that if the US economy recovers in the second half of next year, rekindling arbitrage demand, the yen could face renewed depreciation pressure. From a technical perspective, USD/JPY still has some upside potential in the medium term.

A Decade in Review: The Yen’s Depreciation

Tracing nearly ten years of yen depreciation, several key events have shaped the current landscape:

2011 Earthquake and Nuclear Disaster

The Great East Japan Earthquake and tsunami caused massive economic losses. The Fukushima nuclear disaster triggered an energy crisis. Japan was forced to significantly increase oil imports, boosting dollar demand. Meanwhile, radiation fears severely impacted tourism and agricultural exports, shrinking forex income, and the yen depreciated accordingly.

2013’s Easing Wave

During Kuroda Haruhiko’s tenure, the BOJ launched unprecedented large-scale asset purchases, injecting the equivalent of $1.4 trillion into the market over two years. While stock markets surged, this ultra-loose policy caused the yen to depreciate nearly 30% in 24 months.

2021: Fed Policy Shift

After the Fed announced tightening, the US-Japan interest rate differential widened rapidly. With Japan’s borrowing costs extremely low, large-scale carry trades emerged—borrowing yen to buy various assets, earning interest rate spreads or capital gains. During periods of global economic recovery, such trades exerted significant downward pressure on the yen.

2023-2024 Policy Turning Point

As global central banks raised rates, the BOJ’s new governor Ueda Kazuo’s stance on ending easing became clearer. When Japan’s CPI rose above 3.3%, reaching levels not seen since the 1970s oil crisis, a policy shift became inevitable. The two rate hikes in 2024 marked a historic turning point in Japan’s monetary policy.

How Should Investors Respond?

Practical Framework for Judging Yen Trends

Monitor Inflation Indicators

CPI trends directly influence central bank decisions. High inflation prompts rate hikes, favoring yen appreciation; low inflation leads to continued easing, pressuring the yen. Japan remains one of the countries with relatively low inflation globally.

Track Economic Data

GDP and PMI are barometers of Japan’s economic health. Strong data suggest room for policy adjustment; weak data favor easing, which is negative for the yen. Currently, Japan’s economic growth among G7 countries remains relatively stable.

Interpret Central Bank Statements

Ueda Kazuo’s every statement can trigger market reactions. Investors should beware of over-interpretation by media and seek policy signals from actual actions rather than words.

Pay Attention to Global Central Bank Policies

Since exchange rates are relative, if the Fed and other major central banks enter a rate-cut cycle, the yen could effectively appreciate. Additionally, the yen’s safe-haven status often makes it a refuge during geopolitical crises.

Summary and Outlook

Although short-term factors like the widening US-Japan interest rate differential and delayed BOJ policy adjustments continue to pressure the yen, from a medium- to long-term perspective, the yen will eventually return to its intrinsic value, and the downward cycle of the yen’s trend is expected to end.

For travelers and consumers, consider gradually accumulating yen; for forex traders, combine personal risk tolerance and financial situation to carefully assess market volatility risks. Regardless, understanding these key drivers is fundamental to formulating effective investment strategies.