Japanese Yen Trend 2026: From Falling Below 159 to When Will It Rebound?

As we enter 2026, the Japanese yen continues to influence global financial markets. From falling below the key level of 159 at the end of last year to still fluctuating at high levels in February, investors are generally asking: Will the yen keep falling? What underlying factors are driving this “yen crisis”? This article will analyze the core drivers of the yen’s trend and provide practical decision-making references for Taiwanese investors.

Why Is the Yen Continually Depreciating? Analyzing Five Core Factors

The yen’s weakness over the past year is not coincidental. A detailed analysis reveals at least five structural factors working simultaneously:

1. The “Death Grip” of the US-Japan Interest Rate Differential

This is the most direct catalyst. Although the Bank of Japan began raising interest rates in 2025, the hikes have been far below market expectations. In December last year, the BOJ raised rates to 0.75%, still well below the Fed’s 5.25%–5.5% range. This huge interest rate gap has led to arbitrage trading: investors borrow low-cost yen to buy higher-yielding dollar assets, creating ongoing selling pressure on the yen. As long as the US-Japan interest rate differential exists, the yen will struggle to strengthen.

2. Concerns Over Japan’s Fiscal Expansion

After Prime Minister Sanae Yoshihide took office in October 2025, Japan continued with “Abenomics”-style large-scale fiscal stimulus. While short-term growth benefits are evident, long-term concerns about increasing government debt and rising fiscal deficits have begun to weigh on markets. These worries are priced into the exchange rate, further depressing the yen.

3. Global Risk Appetite Environment Favors Arbitrage

In a relatively stable global economy with strong stock markets, investors tend to borrow in low-interest-rate currencies for arbitrage. The yen, historically seen as a “low-interest safe-haven currency,” becomes the preferred financing tool. As long as global risk sentiment remains positive, the yen is prone to being sold off.

4. Japan’s Economic Fundamentals Are Weak

Weak domestic consumption, sluggish GDP growth, and imported inflation pushing up prices signal economic fragility. These indicators suggest the BOJ must be cautious with rate hikes; even if they raise rates, the increases are likely to be modest. The BOJ appears reluctant to tighten excessively for fear of harming the fragile economic recovery, leaving markets with the impression that the central bank is not hawkish enough.

5. The Resilience of the US Dollar Index

The US economy remains relatively resilient, with policies like tariffs under the Trump administration supporting a strong dollar, coupled with sticky inflation. The Fed has hinted at a slower pace of rate cuts. Under these conditions, the dollar continues to attract capital, exerting natural downward pressure on the yen.

Critical Moments in the BOJ’s Policy Shift

Understanding the current yen trend requires reviewing key turning points in BOJ policy:

March 2024: A Historic Shift

The BOJ ended its years-long negative interest rate policy, raising the policy rate from -0.1% to 0–0.1%. This was the first rate hike since 2007, ending a 17-year era. However, market reactions were unexpected—rather than appreciating, the yen continued to weaken due to widening interest rate differentials, highlighting that rate hikes alone cannot reverse the long-term depreciation trend.

July 2024: Unexpected Shock

The BOJ announced a 15 basis point hike to 0.25%, exceeding market expectations of a 10 basis point increase. Initially, the yen appreciated for four days, but then a larger chain reaction occurred—massive yen arbitrage unwindings triggered global market turmoil. The Nikkei 225 plunged 12.4% on August 5, in what was dubbed “Black Monday.” This event underscored that yen appreciation has limited power; once unwinding begins, it can cause market turbulence.

January 2025: Major Adjustment

The BOJ raised rates from 0.25% directly to 0.5%, the largest single hike since 2007. This move was supported by March’s 3.2% YoY CPI and 2.7% wage growth. Despite the clear stance, subsequent data showed that a one-time rate hike was insufficient to reverse the yen’s trend—USD/JPY fell from around 158 at the start of the year to about 150, reaching a low of 140.876 in April.

September–November 2025: Stalemate

The BOJ kept rates steady at 0.5% for several months, and the yen continued to weaken, with USD/JPY breaking above 150 again, reflecting market doubts about future BOJ actions.

December 2025: Second Rate Hike

The BOJ increased rates by 0.25 percentage points to 0.75%, the highest level in nearly 30 years since 1995. The move was supported by inflation and wage data, with signals that further hikes would follow if economic conditions aligned. Yet, market reactions remained muted, and the yen did not strengthen—in fact, it declined afterward.

Diverging Institutional Forecasts: Is There Still Room for Yen Decline?

On January 23, 2026, the BOJ kept rates at 0.75%. This dovish stance led most to believe that policy is insufficient to reverse yen weakness. Three major banks issued their forecasts:

Citigroup’s “Negative Real Interest Rate” Diagnosis

Citigroup Japan head Hoshino Akira pointed out that the yen’s weakness stems from negative real interest rates. When nominal rates are below inflation, real purchasing power declines, prompting investors to sell yen. Citi believes only if the BOJ raises nominal rates enough to eliminate negative real rates can the yen reverse its decline.

JPMorgan’s Most Pessimistic Outlook

Junya Tanase, head of FX strategy at JPMorgan Japan, predicts USD/JPY could reach 164 by the end of 2026. He argues that Japan’s fundamentals remain fragile, and as other major economies’ rates rise, the effects of BOJ tightening will be limited. Cyclical factors may even turn adverse for the yen.

BNP Paribas’ “High-Range Consolidation” Forecast

Parisha Saimbi, emerging Asian FX strategist at BNP Paribas, expects the yen to dip to around 160 by the end of 2026. She believes the macro environment remains supportive of risk appetite, sustaining arbitrage flows. Considering the resilience of arbitrage demand, cautious central bank actions, and a potentially more hawkish Fed than expected, USD/JPY could stay in a high range.

While forecasts differ, they share a common view: in the short term, the yen will continue to face depreciation pressures.

Four Key Indicators to Watch for Yen Trends

Investors seeking to predict the yen’s future should closely monitor these four indicators:

1. Consumer Price Index (CPI)

Inflation directly influences BOJ policy space. Japan remains one of the few countries with low inflation. Rising inflation strengthens the case for rate hikes, supporting yen appreciation; falling inflation reduces the urgency, putting downward pressure on the yen.

2. Economic Growth Data (GDP and PMI)

GDP and PMI reflect economic health. Strong data give the BOJ room to hike rates, boosting the yen. Conversely, slowing growth prompts the BOJ to maintain easing, weakening the yen. Japan’s economy remains relatively stable but faces downside risks.

3. BOJ Policy and Governor’s Statements

BOJ Governor Ueda Kazuo’s comments can trigger market moves. His tone on future hikes and economic outlooks will influence short-term yen movements. Currently, markets are cautious about the pace of tightening.

4. Global Market Sentiment and Risk Appetite

US Fed policies, global stock trends, geopolitical events all impact the yen. When risk appetite rises, arbitrage trading intensifies, and the yen is sold off; when risk aversion returns, the yen’s safe-haven appeal reemerges. For example, escalation of conflicts like the Israel-Hamas situation can cause short-term yen spikes.

How Should Investors Respond?

Given the complex outlook, Taiwanese investors can consider the following strategies:

For Consumers with Spending Needs

If planning travel, shopping, or studying in Japan, consider staggered purchases. The yen may weaken further in the short term, but waiting for the perfect bottom isn’t necessary. Gradual buying can average costs and profit from potential rebounds.

For Forex Traders

To profit from yen trends, monitor the four indicators closely. When CPI rises, hawkish BOJ signals emerge, or global risk sentiment shifts to risk-off, the yen may rebound. Risk management is crucial, as unwinding positions can cause short-term volatility.

For Conservative Investors

It’s advisable to stay on the sidelines for now. The yen’s trend remains uncertain, with continued volatility expected over the next three to six months. Wait for clearer policy signals or economic data before acting.

Conclusion: When Will the Yen End Its Decline?

While short-term factors like US-Japan interest rate differentials and slow policy shifts limit the yen’s rebound potential, long-term prospects suggest the yen will eventually return to fair value, ending its prolonged depreciation. The key depends on three conditions: the BOJ accelerating rate hikes, US economic slowdown prompting Fed rate cuts, and global risk sentiment turning risk-averse.

Currently, these conditions are not fully in place, explaining why the yen remains in flux. However, investors should stay attentive—each BOJ meeting and economic report could change the landscape. Those with investment needs should consider their financial situation and risk tolerance, and develop plans under professional guidance.