Yen exchange rate trend analysis: Is there still room for decline in 2026?

What has the Japanese Yen experienced over the past decade? The answer to this question directly relates to investors’ judgments about the future trend of the yen’s exchange rate. Since the burst of Japan’s bubble economy in the 1990s, the Bank of Japan has implemented a prolonged ultra-loose monetary policy. The USD/JPY exchange rate rose from 75.6 in 2011 to around 152 in 2021, with the yen depreciating by over 50%. However, starting in 2023, this sustained depreciation began to reverse, and the market is re-evaluating the yen’s value.

Latest Trends in the Yen Exchange Rate

Entering 2025, the yen has shown volatile fluctuations. At the beginning of the year, USD/JPY was around 160. On April 21, it dropped to a low of 140.876 for the year, with the yen appreciating by over 12% in three months. But then the trend reversed; from May to September, the yen repeatedly declined, and in October, USD/JPY broke through the 150 level and continued to rise.

Latest data shows that on October 31, USD/JPY fell below 154, hitting a eight-month high. What does this volatility reflect? The main driving forces include: widening interest rate differentials between the US and Japan, the Bank of Japan’s slow pace of rate hikes, and uncertainties surrounding Prime Minister Sanae Suga’s government policies.

The Significance of the Bank of Japan’s Policy Turning Point

Understanding the future direction of the yen requires tracking the pace of the Bank of Japan’s policies. In March 2024, the BOJ ended its years-long negative interest rate policy, raising rates to the 0-0.1% range. This was the first rate hike in 17 years since 2007. Although the market initially expected this would support the yen, the yen continued to weaken due to the still-expanding US-Japan interest rate differential.

The decision on July 31, 2024, marked a turning point. The BOJ unexpectedly raised rates by 15 basis points to 0.25%, causing shockwaves in global financial markets and triggering large-scale yen carry trade unwinding. The yen temporarily appreciated over the next two months, but in September, the BOJ decided to pause rate hikes, maintaining the rate at 0.25%.

On January 24, 2025, the BOJ made its most aggressive move in recent years, raising rates from 0.25% to 0.5%, the largest single rate increase since 2007. This decision was supported by two factors: a 3.2% YoY increase in core CPI in March, exceeding expectations, and a 2.7% wage increase from labor negotiations in fall 2024. Over the following ten months, the BOJ kept rates steady at 0.5%, and the yen remained under pressure.

Key Constraints on Yen Exchange Rate Movements

The US-Japan interest rate differential remains the core driver

Currently, the BOJ maintains a low rate of 0.5% without signaling any clear intention to hike further, while the Federal Reserve remains hawkish. Expectations of a rate cut in December have diminished, and the widening interest rate gap continues to be the main reason for the yen’s weakness. Even if the BOJ eventually normalizes rates to around 1%, this interest rate differential is unlikely to change in the short term.

Resilience of the US economy

Despite signs of a softening labor market, the overall US economic outlook remains relatively optimistic. Fed officials continue to emphasize inflation risks and have indicated a low likelihood of further rate cuts this year, supporting the dollar’s relative strength against the yen.

Technical outlook still shows an upward trend

From a technical perspective, USD/JPY has found support above 153.30. Oscillator indicators on the daily chart remain in positive territory without overbought signals, indicating short-term upside potential. If the pair breaks through resistance at 154.80 effectively, it could test the psychological level of 155.00. Conversely, if it falls below 154.00, support levels are seen at 153.25 and 152.15.

Technical analysts note that USD/JPY is firmly above the 200-day moving average, with the 50-day moving average trending upward. The MACD indicator completed a bullish crossover at the end of last month, further reinforcing a bullish outlook. While short-term pullbacks cannot be entirely ruled out, the overall technical structure remains optimistic.

Will the Yen Continue to Depreciate in 2026?

The market currently holds a “moderately bearish” consensus on the short-term outlook for the yen, expecting the dollar to continue strengthening against the yen, with ongoing depreciation pressure on the yen. However, this outlook is subject to change:

Potential turning points

Japanese economic data warrants close attention. Any signs of accelerating wage growth could raise expectations of further BOJ rate hikes, providing support for the yen. Meanwhile, BOJ Governor Ueda Kazuo has stated that the bank will continue to monitor wage growth next year to assess whether prices and wages can form a virtuous cycle. This cautious stance is interpreted by the market as reducing the likelihood of rate hikes within the year, increasing yen downside pressure.

Positive long-term signals

From a medium- to long-term perspective, many institutions remain optimistic about the yen. Goldman Sachs notes that historical experience shows that even if the yen’s exchange rate deviates from its fair value in the long run, it tends to revert to its intrinsic level. The firm projects that as Japan’s monetary policy gradually normalizes, the USD/JPY rate could rise to around 100 yen over the next decade, implying a potential structural reversal of the long-standing depreciation trend.

Key Variables Influencing the Yen Exchange Rate

Inflation data and central bank responses

Global inflation remains high, with oil prices rising due to active supply-side factors. If inflation continues to accelerate, central banks may raise interest rates to control prices, which could lead to yen appreciation. Conversely, if inflation cools, the BOJ would lack urgency to tighten policy. Notably, Japan remains one of the few countries with relatively low inflation rates.

Economic growth signals

Strong data in GDP, PMI, and other indicators suggest the central bank has room for tightening, which is positive for the yen. Conversely, slowing growth would necessitate continued easing, weighing on the yen. Currently, Japan’s economic growth is relatively stable among G7 countries.

Market interpretation of central bank statements

New BOJ Governor Ueda Kazuo’s comments are likely to be scrutinized and amplified. Especially statements regarding negative interest rates and yield curve control (YCC), any signals of tightening or doubts about easing could trigger rapid yen appreciation.

Safe-haven sentiment internationally

The yen is a traditional safe-haven currency, often appreciating during crises. For example, after escalations in conflicts such as the Israel-Hamas situation, the yen surged against other currencies. Additionally, policy adjustments by other central banks also influence the yen’s relative value—if many central banks cut rates collectively, the yen could effectively appreciate.

Investment Advice and Risk Warnings

Given the current environment, the yen’s exchange rate remains highly uncertain. In the short term, the widening US-Japan interest rate differential is unlikely to narrow quickly, and depreciation pressures persist. However, in the medium to long term, BOJ policy normalization and changes in the global economic landscape could create conditions for yen appreciation.

Investors with tourism or consumption needs may consider gradually accumulating yen positions to meet future requirements. Traders seeking to profit from exchange rate fluctuations should implement strict risk controls and thoroughly assess their financial situation and risk tolerance. In such a complex environment, professional advice is indispensable.