When will the Japanese Yen stop falling? The key points for the 2026 exchange rate trend are these.

Is the Japanese Yen continuing to depreciate? Is there a chance for a rebound? If you’re considering investing in JPY, you need to understand these key points first.

Why Is the Yen Continually Weakening? Three Major Culprits You Can’t Ignore

In 2025, the Japanese Yen experienced a rollercoaster. At the beginning of the year, USD/JPY soared to around 160, and on April 21, it briefly hit a 2025 low of 140.477—an appreciation of over 12% in just three months. But the good times didn’t last. In the second half of the year, the Yen came under pressure again, falling below 157 in November to hit a half-year low, and even after the Bank of Japan raised interest rates to 0.75% in December, the trend remained bearish. Currently, it hovers around 156.

The fundamental reasons for the Yen’s continued depreciation are not due to a single factor but multiple pressures stacking up:

The US-Japan interest rate differential is the main culprit. Although the Bank of Japan raised rates twice in 2025, Japanese interest rates remain far below those in the US. This huge interest rate gap has led to persistent “yen carry trades”—investors borrow low-yielding yen to invest in higher-yield US assets, causing continuous selling of the Yen. Even with rate hikes, market expectations for future moves remain cautious, making it difficult to effectively boost confidence in the Yen.

Japan’s fiscal expansion raises concerns. After Prime Minister Sanae Takaichi took office in October 2025, she launched large-scale stimulus policies. While these boosted the economy, they also meant increased government debt issuance and rising fiscal deficit risks. Markets worry about rising fiscal risk premiums, further devaluing the Yen.

The US economy remains relatively resilient. With sticky inflation and steady growth, combined with the Trump administration’s strong dollar and tariff policies, the US dollar index stays strong. As a low-yield currency, the Yen is easily sold off in this environment.

Japan’s domestic economy is weak. Weak consumer spending, occasional negative GDP growth, and imported inflation pushing up prices have led the Bank of Japan to adopt a cautious stance on rate hikes, avoiding excessive tightening that could hinder recovery, indirectly prolonging Yen weakness.

Will the Yen Fall Further in 2026? The Key Depends on These Four Points

Whether the Yen can stop falling and rebound in the new year depends on four key variables:

The hawkishness of the central bank policy. The BOJ has raised rates to 0.75%, but market expectations suggest it may only approach 1% by mid to late 2026. The decisions from the January 22-23 meeting and Governor Ueda Kazuo’s statements will be critical signals. If a clear rate hike path is communicated, it could narrow the US-Japan interest gap and boost the Yen; if the BOJ remains dovish or emphasizes economic risks, the Yen will continue to weaken.

The pace of Fed rate cuts. If the US economy slows or inflation remains sticky, prompting the Fed to accelerate rate cuts, the narrowing interest rate differential could benefit the Yen. Conversely, if the Fed cuts rates slowly or the US economy remains robust, the dollar will stay strong, limiting Yen rebounds.

Global risk appetite shifts. As a low-interest-rate currency, the Yen is often borrowed for arbitrage during optimistic market conditions. If stock markets become volatile or geopolitical risks rise, unwinding carry trades could cause the Yen to appreciate rapidly. Conversely, if global risk sentiment stabilizes, the Yen will continue to face capital outflows.

Improvement in Japan’s real interest rates. Currently, Japan’s real interest rates are still negative, a structural weakness for the Yen. Only when inflation gradually declines or nominal rates continue to rise can real interest rates improve, supporting the Yen.

How Do Wall Street and Professional Institutions View It? Predictions Point to Further Yen Weakness

Since the BOJ’s rate hikes haven’t effectively boosted the currency, bearish sentiment on the Yen has intensified on Wall Street, and a consensus is forming that the Yen will continue to weaken.

Junya Tanase, Head of FX Strategy at JPMorgan Japan, offers the most pessimistic forecast: by the end of 2026, the Yen could fall to 164. He notes that the Yen’s fundamentals remain quite weak, and fundamental improvements are unlikely in 2026. As other major economies’ interest rates rise and market expectations are priced in, the effects of the BOJ’s tightening will be limited.

Parisha Saimbi, FX strategist for Emerging Asia at BNP Paribas, also expects the Yen to decline to 160 by the end of 2026. She explains that the global macro environment in 2026 will still favor risk appetite, which generally supports carry trades. Considering the BOJ’s cautious stance and the Fed possibly being more hawkish than expected, USD/JPY is expected to stay in high ranges.

How to Judge the Yen’s Future Trend? Four Monitoring Indicators

Want to assess when the Yen might reverse? Keep an eye on these indicators:

Inflation rate (CPI). Inflation directly influences central bank policy space. Currently, Japan’s inflation is relatively low globally. If inflation continues to rise, the BOJ has more reason to hike rates, which could strengthen the Yen; if inflation cools, the BOJ will likely maintain easing, and the Yen may struggle to appreciate.

Economic growth data. GDP and Purchasing Managers’ Index (PMI) are key. Strong economic data support rate hikes and are bullish for the Yen; economic slowdown calls for easing, which is bearish. Japan’s economy remains relatively stable among G7 countries.

Central bank statements and decisions. As BOJ Governor, Ueda Kazuo’s words are closely scrutinized; market reactions can be significant in the short term. Monitoring his press conferences and official statements is essential.

Global central bank policy trends. Exchange rates are relative. If most central banks cut rates, the Yen effectively appreciates; if they hike, the Yen depreciates. Additionally, the Yen is a safe-haven asset—during crises, investors tend to buy Yen to protect assets.

Key Moments in Recent Yen Movements

Understanding Yen trends requires reviewing pivotal moments that changed the game:

2011 Great East Japan Earthquake triggered the Fukushima nuclear disaster. Japan’s energy needs surged, tourism and agricultural exports suffered, foreign exchange income declined, and the Yen started weakening.

2013 Abe’s massive easing—the BOJ launched unprecedented asset purchases, injecting about $1.4 trillion into the market over two years. While boosting stocks, the Yen depreciated nearly 30% in that period.

2021 US tightening signals—the Fed signaled tapering, rapidly widening the US-Japan interest gap. Japan’s ultra-low rates attracted carry trade inflows, putting downward pressure on the Yen.

2024 BOJ policy shift—contrary to global easing trends, the BOJ raised rates in March and July by 10 and 15 basis points respectively. This was the most significant policy change in a decade, but concerns over Japan’s economic outlook limited Yen appreciation.

What Yen Investors Need to Know

In the short term, the widening US-Japan interest rate gap and slow policy normalization will continue to suppress the Yen. However, in the long run, the Yen will eventually return to a reasonable valuation and end its persistent decline.

For those traveling or spending in Japan, gradual currency exchanges to meet future needs are advisable. Forex traders should base decisions on thorough understanding of the above analysis, combined with their risk tolerance, and proceed cautiously. Always consider consulting professionals and implementing risk management strategies to navigate market volatility.