2026 Yen Trend Analysis: Central Bank Policies and the U.S.-Japan Interest Rate Differential Tug-of-War

Why has the Japanese Yen been continuously depreciating? This question has been troubling many who want to enter the market to invest in the yen. From the high of 157 at the beginning of the year, it has been steadily falling to over 140, then rebounded to around 156 now. The fluctuations in the yen make it a bit confusing. But a careful look at the data and central bank actions reveals a clear logic.

Looking at the Yen’s Continuous Depreciation from a Historical Perspective

To understand the present, we need to look back. The history of the yen’s depreciation is actually a history of central bank policy evolution.

The 2011 Great Japan Earthquake was a turning point. The nuclear disaster triggered an energy crisis. Japan began大量 buying US dollars to purchase oil, while tourism and agricultural exports suffered setbacks, leading to a significant decline in foreign exchange income. This natural disaster directly impacted the yen.

2013 was the real watershed. The new central bank governor Haruhiko Kuroda launched unprecedented large-scale QE (quantitative easing), promising to inject the market with $1.4 trillion worth of liquidity within two years. What was the result? The stock market rose, but the yen depreciated nearly 30% over two years. This served as a profound lesson: loose monetary policy is the yen’s nemesis.

2021 marked another critical moment. The Federal Reserve began tightening policy, while the Bank of Japan was still asleep. At this point, arbitrage trading exploded—investors borrowed in ultra-low-interest yen and invested in high-yield US dollar assets. The better the global economy performed, the greater the pressure for the yen to depreciate, because no one wants to hold a currency with no interest.

What is happening now? Why is the yen still falling?

In 2025, the Bank of Japan finally moved. In January, it raised interest rates by 50 basis points to 0.5%, and in December, it raised another 25 basis points to 0.75%—the highest level since 1995. It seems aggressive, but what was the market’s reaction? The yen continued to fall. This appears contradictory but actually reflects a reality: the US-Japan interest rate differential remains huge.

US interest rates are still high at 3.25%-3.5%, while Japan is only at 0.75%. This gap is enough for any rational investor to continue borrowing yen and investing in dollars. Plus, the Japanese central bank itself admits that real interest rates are still in negative territory, meaning the BOJ is still effectively easing.

Another pressure comes from government fiscal policy. The new Prime Minister Sanae Takaichi launched large-scale stimulus measures, increasing government debt issuance and raising fiscal deficit risks. Markets worry about Japan’s credit premium rising, which further weakens the yen.

Additionally, Japan’s own economic weakness plays a role. Domestic consumption remains tepid, GDP occasionally contracts, and real purchasing power is under pressure. In this environment, the BOJ has limited room to raise interest rates—no one wants to push the economy into recession by raising rates too quickly.

In contrast, the US economy is relatively resilient. Although inflation has retreated from high levels, it remains sticky. The Trump administration also promoted a strong dollar policy and tariffs, supporting the dollar index. As a result, USD/JPY has risen from over 140 in April to around 155-157 now.

How do institutions view the yen’s trend in 2026?

Wall Street is currently quite pessimistic about the yen. There are mainly two forecasts:

The most pessimistic outlook comes from JPMorgan. Their head of FX strategy in Japan, Junya Tanase, believes the yen could fall to 164 by the end of 2026. The reason is straightforward: the yen’s fundamentals are quite weak, and there’s little hope for a fundamental improvement next year. Even if the BOJ continues to raise rates, in the context of rising rates in other economies, this relative advantage will diminish.

A somewhat less pessimistic forecast comes from BNP Paribas. Their Asia FX strategist, Parisha Saimbi, expects the yen to dip to 160 by the end of 2026. Her logic is that the global macro environment next year should still favor risk assets, which benefits carry trades. Considering the persistence of carry trades, the cautious stance of the BOJ, and the Fed possibly being more hawkish than expected, the USD/JPY will likely stay in a high range.

Both institutions point to the same conclusion: the yen is unlikely to reverse in the short term.

What could change the yen’s fate?

To judge the future of the yen, you need to monitor these variables:

First is the BOJ’s subsequent actions. The January 22-23 meeting is critical. If Governor Ueda signals a clear hawkish stance, such as outlining a clear rate hike path, it could boost yen confidence. Conversely, if the focus is on economic downside risks, the yen may continue to weaken.

Second is the pace of narrowing the US-Japan interest rate differential. If the Fed cuts rates rapidly due to economic slowdown, reducing the interest gap, it could benefit the yen. But the mainstream expectation is that the Fed will be cautious with rate cuts, possibly even more hawkish than expected, keeping the dollar strong.

Third is global risk sentiment. The yen is always sold off when risk appetite is high because investors borrow yen to chase higher yields. If stock markets correct and carry trades unwind, the yen will spike higher. Therefore, watching US stock volatility, tariff policy developments, and global risk appetite is crucial for predicting yen movements.

Fourth is inflation and economic data. If Japan’s CPI, PMI, and GDP data strengthen, it indicates the BOJ has more room to raise rates. If these data weaken, the BOJ may revert to easing, and the yen will continue to weaken.

How long will the yen remain weak?

Honestly, from this perspective, it’s unlikely that the yen will see a significant rebound in the first half of 2026. The US-Japan interest rate differential, carry trades, and global risk sentiment are all factors unlikely to reverse quickly.

But it’s worth noting that the yen has a safe-haven attribute. If a major global crisis suddenly occurs, the yen could appreciate. Similar to last year’s escalation of the Israel-Hamas conflict, the yen surged against other currencies in the short term.

For those looking to invest in the yen, the current advice is:

• For travel or shopping needs, consider buying in installments rather than all at once.
• For forex trading, establish a tracking system for BOJ meetings, US economic data, and global risk events.
• Focus on the January central bank meeting, March CPI data, and US stock volatility to guide carry trade movements.

The yen will eventually return to its rightful level, but this process may take longer than expected. Until then, maintaining good risk control and capital management is always the top priority.