Has the Japanese Yen's decline bottomed out? Where are the reversal opportunities in the exchange rate by 2026?

The Japanese Yen has experienced a rollercoaster this year, appreciating at the beginning, then plunging mid-year, and finally hitting a bottom at year-end. The USD/JPY broke through 157 to reach a six-month low, but what does this recent decline truly reflect? Will it continue to fall in the future?

Why has the Yen fallen so sharply? Revealing the three key factors

Central Bank Policy Divergence

The Bank of Japan and the Federal Reserve are on two different paths. In January 2025, the BOJ will raise its benchmark interest rate from 0.25% to 0.5%, marking the largest single rate hike since 2007. Meanwhile, the Fed is considering rate cuts, and this widening interest rate differential has directly boosted the dollar’s value. As Japan’s borrowing costs rise and US borrowing costs fall, capital naturally flows into the US, leading to continued selling of the Yen.

Fiscal Policy Concerns

Prime Minister Fumio Kishida’s aggressive fiscal policies have attracted attention, but market doubts about Japan’s long-term fiscal sustainability have grown. This sense of insecurity prompts investors to flee Yen assets and seek the safer US dollar.

Reverse Impact of Interest Rate Differentials Trading

Japan has maintained low interest rates for a long time, attracting large arbitrage flows. But as signals of rate hikes emerge, these trades start reversing—borrowers of Yen rush to close positions, creating heavy selling pressure and further accelerating Yen depreciation.

Technical Analysis of Yen’s Decline: From 160 to 140 in a Sudden Drop

At the start of 2025, USD/JPY was around 160. By April 21, it had fallen to a low of 140.477 for the year. In just three months, the Yen appreciated over 12%, a rapid reversal that is quite remarkable.

However, the trend then took an unexpected turn. From May to June, the Yen briefly rebounded, only to weaken again. By October, USD/JPY broke through 150, and in November, it even fell below 157. What does this indicate? It shows that market confidence in Japan’s economic outlook is wavering.

Japan’s Finance Minister issued a “strong warning,” pointing out that the market has experienced one-way, rapid fluctuations—this is the most intense intervention signal since September 2022. The market is beginning to anticipate that the Japanese government may intervene directly in the currency market.

Key Turning Point: Will 2026 truly see a bottom?

The attitude of the Bank of Japan is the decisive factor

For the Yen to truly reverse, the BOJ must send a clear signal of rate hikes. Currently, the benchmark rate is at 0.5%, still low compared to other developed countries. If the December BOJ meeting establishes a more aggressive rate hike path, the exchange rate could plummet sharply. From a technical perspective, a risk control level can be set at 156.70; if it breaks this level, the next target could be 150 or even lower.

Fed rate cuts will strengthen the Yen

As signs of US economic slowdown become more apparent, expectations for rate cuts are reigniting. This is a major bullish factor for the Yen—US dollar depreciation and Yen appreciation.

How do institutions view the Yen’s outlook in 2026?

Morgan Stanley’s latest research indicates that if the Fed begins a series of rate cuts, the Yen could appreciate nearly 10% against the dollar in the coming months. The bank believes that the USD/JPY has deviated from fair value, and as US Treasury yields decline, this deviation is expected to be corrected in the first quarter of 2026. Based on this, Morgan Stanley forecasts USD/JPY will fall to around 140 at the beginning of next year.

However, the report also warns that if the US economy recovers later next year, driving a new wave of arbitrage trades, the Yen could come under further pressure. From a technical standpoint, USD/JPY still has room to rise, but the overall trend is shifting.

A comprehensive review of the BOJ’s policy shift: from easing to tightening

To understand the current Yen depreciation, it’s essential to review recent changes in BOJ policy:

March 19, 2024 — End of negative interest rate era
The BOJ decided to end its -0.1% negative rate policy, raising rates to the 0–0.1% range. This was the first rate hike since 2007, marking the end of an ultra-loose monetary policy. However, the market did not respond positively; the Yen continued to weaken as the US-Japan interest differential widened.

July 31, 2024 — Unexpected 15 basis point rate hike
The BOJ announced a 15 basis point increase (above the market expectation of 10 basis points), raising rates to 0.25%. This decision triggered massive unwinding of Yen arbitrage trades, causing turbulence in global financial markets, with the Nikkei dropping 12.4% on August 5. After a brief decline, the Yen rebounded sharply over four days.

September 20, 2024 — Pause in rate hikes
The BOJ decided to keep rates at 0.25%. Over the next four months, the central bank remained on hold, but USD/JPY rose from around 150 to break through 157.

January 24, 2025 — Major rate hike of 50 basis points
This was a pivotal decision. The BOJ raised its benchmark rate from 0.25% to 0.5%, the largest single increase since 2007. The move was driven by two factors: core CPI rising 3.2% YoY, exceeding expectations, and wage negotiations in fall 2024 reaching a 2.7% increase. After the hike, the 10-year yield surged to 1.235%, and the Yen experienced oscillations—USD/JPY dropped from 158 to around 150, even touching 140.876 in April.

February to October 2025 — Policy stalemate period
During six BOJ meetings, rates remained unchanged at 0.5%. Despite this, the Yen continued to weaken, with USD/JPY again surpassing 150. The BOJ Governor Ueda in Parliament warned of risks from Yen’s weakness pushing up import costs, which was interpreted as a signal of potential rate hikes.

Four key indicators to watch for Yen’s future

To gauge the Yen’s future direction, investors should monitor these four indicators:

1. Inflation Rate (CPI) — The direct trigger for rate hikes
Japan’s inflation remains relatively low globally, but if inflation continues to rise, the BOJ will be forced to hike rates to control prices, which is bullish for the Yen. Conversely, if inflation cools, the easing expectations will increase, short-term negative for the Yen.

2. Economic Growth Data — GDP and PMI are critical
Strong GDP and PMI figures suggest the BOJ has room to tighten, which supports Yen appreciation. Slowing growth indicates the need for continued easing, which is bearish for the Yen. Currently, Japan’s economy is relatively stable among G7 nations.

3. Central Bank Statements — Ueda’s words become market focus
Every comment from BOJ Governor Ueda can be amplified. Signals of rate hikes will push the Yen higher; hints of easing will do the opposite.

4. International Environment — Fed policy as a key variable
Since exchange rates are relative, the actions of other central banks influence the Yen. If the Fed cuts rates, the Yen will naturally appreciate; if the Fed maintains high rates, Yen upside is limited. Additionally, the Yen is a safe-haven asset—during global risk events, investors tend to buy Yen for safety.

The past decade of Yen’s depreciation: a historical background

To understand the deep logic behind the current Yen decline, it’s helpful to review some key turning points over the past ten years:

2011 Earthquake and Nuclear Crisis — Initial depreciation pressure
The Great East Japan Earthquake and Fukushima nuclear disaster caused huge economic losses. Japan had to buy more US dollars to import oil, and nuclear radiation fears hurt tourism and exports, reducing forex income and weakening the Yen.

2012–2013 Abenomics — Massive easing begins
Prime Minister Shinzo Abe launched “Abenomics,” and the BOJ announced unprecedented large-scale asset purchases. Governor Kuroda promised to inject the equivalent of $1.4 trillion into the market over two years. Stocks rose, but the Yen depreciated nearly 30% over that period.

2021 Fed tightening begins — Widening interest differentials
After the Fed signaled tightening, Japan’s borrowing costs remained very low, attracting carry trades. Investors borrowed Yen to buy assets, creating downward pressure on the Yen during a period of global economic recovery.

2023 policy shift expectations — End of easing phase
New BOJ Governor Ueda hinted at possible policy changes, and inflation rose above 3.3%, prompting market expectations of tightening.

2024 to present — Policy adjustments and volatile exchange rates
Amid a global environment of monetary easing, the BOJ moved decisively, raising rates multiple times to 0.25% and then 0.5%, causing sharp Yen fluctuations. Due to the gradual pace of adjustments, the Yen hit new lows.

Conclusion: Should you buy Yen now?

Looking at the big picture, despite the short-term pressures from widening US-Japan interest differentials and delayed BOJ policy responses, the Yen is expected to eventually return to its fair value and end its prolonged decline.

Advice for ordinary investors:

If you plan to travel or spend in Japan, consider gradually buying Yen in installments to meet future needs—no need to exchange all at once.

For those aiming to profit from Yen declines in the forex market, exercise caution, assess your risk tolerance carefully, and base your decisions on the analysis above. Consult professionals if needed, and implement risk controls to avoid losses from market volatility.

The current market consensus is gradually forming: the Yen may have already been oversold at this stage. With BOJ intervention deterrence, a shift to a hawkish stance, and a weakening dollar, the medium-term outlook for Yen strength is broadly established, and the reversal in 2026 should not be overlooked.