Key Insights on the Yen's Trend in 2026: Can Rate Hikes Reverse the Continuous Depreciation

Will the Japanese Yen continue to decline in the future? This is a question many investors are concerned about. As we enter 2026, the yen remains under pressure. Despite the Bank of Japan’s significant policy adjustments last year, market opinions on the yen’s future direction remain divided. This article will analyze the key drivers of the yen’s movement from multiple perspectives, including central bank policies, economic fundamentals, and global capital flows.

Why the Yen Continues to Weaken: The Tug-of-War Between U.S.-Japan Interest Rate Differentials and Policy Expectations

At the start of 2026, the yen’s exchange rate remains weak. On January 14, USD/JPY broke below 159 in European and American markets, briefly hitting a low of 159.454. Although Japanese Finance Minister, officials, and the Prime Minister later made statements to stabilize the exchange rate, the yen temporarily rebounded, but this upward momentum was short-lived. By January 26, USD/JPY had risen back to around 154, raising doubts about the effectiveness of Japanese authorities’ interventions.

The fundamental reasons for the yen’s continued weakness are fourfold: First, the widening interest rate differential between the U.S. and Japan. Despite the BOJ raising rates to 0.75% in December 2025—its highest in nearly 30 years—the Federal Reserve’s rates remain significantly higher. This fuels “yen carry trades”—investors borrowing low-yield yen to invest in higher-yield dollar assets—creating persistent selling pressure on the yen.

Second, Japan’s new government’s expansionary fiscal policies have added downward pressure on the currency. While large-scale stimulus helps boost the economy, it also raises concerns about Japan’s debt levels, further undermining confidence in the yen.

Third, the U.S. economy remains relatively resilient, with sticky inflation. The Trump administration’s strong dollar policy has further solidified the dollar’s strength. In an environment of higher risk appetite globally, the low-yield yen is more prone to sell-offs.

Fourth, Japan’s economic fundamentals remain weak. Domestic consumption is sluggish, and GDP growth is lackluster, prompting the BOJ to remain cautious about raising rates further to avoid damaging the economic recovery.

Limited Rate Hike Impact by the Central Bank; Yen’s Breakthrough Still Pending

On January 23, 2026, the BOJ announced its first policy rate decision of the year, keeping the rate at 0.75%, in line with expectations. However, the yen did not strengthen afterward; it briefly fell to 158.61, just shy of the key psychological level of 160.

The market’s disappointment with the BOJ’s policy stance centers on the pace of rate hikes not meeting expectations. Most expect the BOJ to raise rates to around 1% only by mid-2026 or later. This prolongs the wide interest rate differential, maintaining downward pressure on the yen.

More importantly, the BOJ’s hawkish signals have been insufficient. Although the bank raised rates twice last year—becoming the only major central bank to do so—its cautious approach amid economic uncertainty is interpreted by markets as a sign of concern about the outlook, which in turn exacerbates the yen’s weakness.

Top 3 Global Investment Banks’ 2026 Yen Forecasts: High Downside Risks

Major global financial institutions generally hold a bearish outlook on the yen’s future.

Junya Tanase, Head of FX Strategy at JPMorgan Japan, is the most pessimistic, predicting USD/JPY could reach 164 by the end of 2026. He notes that Japan’s fundamentals remain weak, and this trend shows little sign of reversing in the new year. As other major economies’ rate hike expectations are priced in, the effects of BOJ tightening will be limited, and cyclical factors may even further hurt the yen.

Parisha Saimbi, FX and Rates Strategist at BNP Paribas in Paris covering Emerging Asia, also offers a conservative forecast, expecting USD/JPY to dip to 160 by year-end. She believes the global macro environment remains relatively risk-on, supporting carry trades. Considering the demand for arbitrage, cautious central bank policies, and potentially more hawkish Fed stance than expected, the dollar could stay strong against the yen.

Hitoshi Hoshino, Head of Japan Markets at Citigroup, emphasizes that “yen weakness is driven by negative real interest rates.” He points out that Japanese government bond yields are persistently below inflation, creating a negative real rate environment. To change the yen’s weakness, the BOJ must address this fundamental issue—either through more aggressive rate hikes or easing inflation—to alleviate the negative real interest rate pressure.

Four Key Indicators Influencing Yen Movement

Investors seeking to anticipate a potential turnaround in the yen should closely monitor these factors:

1. Inflation Trends (CPI Data). If Japan’s inflation continues to rise, the BOJ may be forced to accelerate rate hikes, which could strengthen the yen. Conversely, if inflation falls back, the BOJ’s rate hike momentum will weaken, and the yen will remain under pressure. Currently, Japan’s inflation remains relatively low globally, which is a headwind for the yen.

2. Economic Growth (GDP and PMI). Stronger economic data can support yen appreciation by providing the BOJ with more room to raise rates. However, Japan’s growth remains stable but not robust, offering limited support for the currency.

3. Changes in U.S.-Japan Interest Rate Differentials. If the Fed cuts rates due to economic slowdown or persistent inflation, narrowing the interest gap, the yen could benefit. But if the Fed’s rate cuts are slow or the U.S. economy remains strong, the yen’s rebound potential is limited.

4. Global Risk Sentiment and Arbitrage Flows. The yen acts as a safe-haven currency. When global risk appetite rises, unwinding carry trades can push the yen higher. When market sentiment stabilizes, capital outflows from Japan may continue, exerting downward pressure.

Investment Insights

While the short-term widening of the U.S.-Japan interest rate gap and slow rate hikes by the BOJ exert downward pressure on the yen, in the long run, the yen is expected to revert to its fair value and end its prolonged depreciation trend. Investors planning to travel abroad or make overseas purchases can consider gradually building yen positions. For those seeking to profit from forex trading, closely monitor the four key indicators and tailor strategies according to risk tolerance, implementing proper risk management. In any case, consulting a professional financial advisor to develop a personalized investment plan aligned with your financial goals is highly recommended.