Japanese Yen Exchange Rate Trend Analysis: The Mechanisms Behind the 34-Year Low and Predictions for 2026

The Japanese Yen hit a 34-year low in 2025, sparking global investor attention. The USD/JPY exchange rate broke through the 157 level, and this depreciation has lasted nearly 10 months. This article provides an in-depth analysis of the underlying logic behind the Yen’s movement and potential reversal opportunities in the future.

34-Year Low for the Yen: What Happened?

Timeline of Exchange Rate Volatility

In early 2025, the Yen experienced a dramatic shift. The USD/JPY exchange rate, which was around 160 at the start of the year, fell to a low of 140.876 on April 21, the lowest intra-year level, with an appreciation of over 12% in just three months. This initially sparked market optimism for a Yen reversal. However, the rally was short-lived; after May, the Yen came under pressure again, and by the end of October, USD/JPY had broken above 150, and in November, it fell below 157, setting a new low since 1991.

The entire depreciation cycle started in early 2024, with a cumulative decline of over 12%, reflecting fundamental differences between Japan’s monetary policy and the US policy environment.

Dual Drivers of Depreciation

The Yen’s continued weakness is mainly driven by two core factors:

First, the widening interest rate differential between Japan and the US. The Federal Funds Rate remains high, while the Bank of Japan’s policy rate stays at a historic low of 0.5%. The interest rate gap attracts continuous capital inflows into USD assets. Arbitrage traders borrow low-interest Yen to invest in high-yield US bonds and stocks, boosting demand for the dollar.

Second, fiscal policy divergence. Japan’s new government has implemented aggressive fiscal expansion policies, raising concerns in international markets about the sustainability of Japan’s debt. This further diminishes the Yen’s attractiveness.

Japan’s Finance Minister recently issued a “strongest warning” on the exchange rate trend, emphasizing that the market has experienced unidirectional accelerated volatility. Rising import costs due to Yen depreciation are gradually threatening price stability. This is the most forceful intervention stance since September 2022 and indicates that authorities are preparing for market intervention.

34 Years of History: Why Has the Yen Been Under Long-Term Pressure?

To understand the Yen’s trend, it’s essential to review key events over the past decade.

2011 Great Earthquake and Nuclear Crisis

The massive earthquake and Fukushima nuclear disaster devastated Japan’s economy. Japan was forced to import large quantities of oil to fill energy gaps, causing foreign exchange expenditures to soar. Meanwhile, radiation fears hurt tourism and agricultural exports, leading to a sharp decline in forex income. This was the initial trigger for Yen depreciation.

2013 Loose Monetary Policy Era

At the end of 2012, Shinzo Abe launched “Abenomics.” In April 2013, the Bank of Japan announced an unprecedented large-scale asset purchase program (QE), with then-Governor Haruhiko Kuroda pledging to inject the equivalent of $1.4 trillion into the market. While stock markets responded positively, this easing policy depreciated the Yen by nearly 30% over two years.

2021 Interest Rate Differential Trading Era

Starting September 2021, the Federal Reserve began tightening monetary policy, while Japan’s borrowing costs remained extremely low, making Japan a source of financing for arbitrage trades. Investors borrowed heavily in Yen to invest in overseas bonds, stocks, and FX assets, creating persistent Yen depreciation pressure. As long as the global economy remains strong, Yen weakness is hard to alleviate.

2023-2024 Policy Shift

In 2023, new Governor Ueda Kazuo took office and began policy adjustments. In March 2024, Japan ended its negative interest rate policy and raised rates by 10 bps; in July, another 15 bps to 0.25%. This unexpected move caused turbulence in global financial markets, with the Nikkei 225 dropping 12.4% in August and triggering large-scale unwinding of arbitrage trades. However, rate hikes failed to effectively strengthen the Yen, reflecting the offsetting effect of the widening US-Japan interest rate gap.

Yen Trend Analysis: Will There Be a Reversal in 2026?

Decisive Factor: Central Bank Policy Shift

In the short term, whether the Yen can stabilize or rebound depends critically on the Bank of Japan’s stance. Market focus has shifted to the December policy meeting: will the BOJ raise interest rates, and will the Federal Reserve start a rate cut cycle?

If the BOJ signals a clear rate hike and directly intervenes in the forex market, the Yen could plummet sharply, with the exchange rate potentially returning to 150 or even lower. Technically, a “buy on dips” strategy against USD/JPY remains prudent in the short term, with risk control points around 156.70.

Fed Rate Cuts Supporting Yen Strength

As signs of US economic slowdown become more evident, market expectations for the Fed to cut rates are rising. If the Fed initiates a rate cut cycle, it will fundamentally narrow the US-Japan interest rate differential, serving as a key driver for Yen appreciation in the medium term.

Institutional Forecasts Indicate Reversal

Morgan Stanley’s latest strategy forecast suggests that USD/JPY could appreciate by nearly 10% in the coming months. The bank’s analysis indicates that the USD/JPY rate has deviated from fair value, and as US Treasury yields decline, this deviation is expected to correct in the first quarter of 2026. Based on this, Morgan Stanley projects the pair could fall to around 140 Yen early next year.

However, the bank also warns of risks: if the US economy recovers in the second half of 2026, demand for USD arbitrage trades may increase again, putting renewed pressure on the Yen.

Key Factors Influencing Yen Movement

Investors should closely monitor the following variables:

1. Inflation Rate (CPI)

Japan’s current inflation rate remains lower than most global economies, limiting the urgency for rate hikes. If inflation continues to rise, the BOJ’s rate hike space expands, favoring Yen appreciation; otherwise, the Yen remains under pressure.

2. Economic Growth Indicators

Strong data in Japan’s GDP, manufacturing PMI, etc., suggest greater policy adjustment room for the BOJ, which is positive for the Yen. Currently, Japan’s economic growth rate is relatively stable among G7 countries.

3. Central Bank Statements and Policy Decisions

Statements from Ueda Kazuo and other BOJ policymakers are often amplified by markets, potentially causing significant short-term exchange rate volatility. The December policy meeting will be a key event.

4. Global Market Environment

Since exchange rates are relative, the policy directions of major central banks like the Fed and ECB directly impact the Yen’s relative value. Additionally, the Yen’s traditional safe-haven status means geopolitical risks tend to boost demand for Yen during times of increased geopolitical tension.

Future Yen Outlook: Investment Recommendations

Although the short-term US-Japan interest rate differential continues to widen and the BOJ’s policy shift remains slow, the Yen is ultimately expected to revert to its fair value, ending its prolonged decline.

For retail investors, gradual Yen accumulation to meet future needs is advisable; traders seeking profit from exchange rate fluctuations should consider the above analysis, tailor strategies to their financial situation and risk tolerance, and implement proper risk management with predefined stop-loss levels to handle market volatility.

The core logic of Yen movement analysis is: policy divergence → interest rate differential expansion → capital flows → exchange rate trend. Understanding this chain allows investors to find direction amid Yen’s volatile swings.