When will the Yen depreciation end? 2025-2026 Exchange Rate Trends Analysis and Investment Strategies

How far can the Japanese Yen still fall? This is currently the hottest topic in the foreign exchange market. Looking at the trend over the past year, the Yen has hit a 34-year low against the US dollar, but market opinions on its future direction remain highly divided. This article analyzes central bank policies, economic fundamentals, and technical indicators to clarify the core logic behind Yen forecasts for investors.

Why has the Yen fallen into a long-term depreciation dilemma?

Review of the past 10 months’ decline

The USD/JPY exchange rate has risen from around 140 at the beginning of 2024 to break through 157 by November 2025, depreciating by over 12%. This sustained downward wave is not accidental but the result of multiple factors acting together.

Fundamental drivers of depreciation

The current weakness of the Yen mainly stems from two contradictions:

First is policy divergence. The Federal Reserve maintains relatively high interest rates, attracting global capital into dollar assets, while the Bank of Japan has maintained an accommodative stance for a long time, leading to a continued widening of the US-Japan interest rate differential. This interest rate advantage fuels carry trades—investors borrow low-cost Yen to buy dollar-denominated assets for profit.

Second is fiscal concerns. The new Japanese government is implementing active fiscal spending policies, raising doubts about the sustainability of Japan’s long-term debt. Coupled with persistently low domestic inflation and sluggish economic growth, market confidence in Japan’s economic outlook further weakens.

Signals of government intervention

Japan’s Ministry of Finance recently issued the most forceful warning since September 2022 regarding the exchange rate trend, explicitly pointing out abnormal rapid fluctuations in the market. This statement hints that authorities are seriously considering market intervention, which could serve as a catalyst to reverse the Yen’s decline.

Can the Yen reverse in 2026? Key factors analysis

Central bank policy as a decisive variable

Whether the Yen can halt its decline in the short term depends primarily on the Bank of Japan’s stance. If the BOJ signals a clear normalization of policy—such as announcing a specific timetable for rate hikes—it will directly alter market expectations. By 2026, focus will be on whether the BOJ will further raise interest rates and by how much.

The impact of the Fed’s rate cuts

As signs of slowing US economic growth emerge, expectations of the Fed cutting rates are rising. If the Fed indeed enters a rate-cut cycle next year, it will directly narrow the US-Japan interest rate differential, which is crucial for pushing the Yen higher. Morgan Stanley’s analysis suggests that under a scenario of consecutive rate cuts by the Fed, the USD/JPY could appreciate nearly 10% within a few months.

Technical trading opportunities

From a technical perspective, the USD/JPY still has room to test higher levels, but 156.70 has become a key resistance. Once authorities intervene or the BOJ establishes a clear rate hike path, the exchange rate could experience a sharp decline, with targets potentially reaching 150 or even lower.

Institutional consensus on a medium-term Yen rebound

From oversold to recovery

Although the Yen remains in a depreciation channel, market consensus is gradually forming that current exchange rates may be severely oversold relative to fundamentals. Under the combined influence of official intervention threats, expectations of policy shifts, and a weakening US dollar itself, a medium-term Yen strengthening trend is taking shape.

Specific targets from institutional forecasts

Morgan Stanley’s latest research indicates that as the Fed begins a rate-cut cycle, the fair value of USD/JPY will decline significantly. The bank expects this deviation to be corrected in the first quarter of 2026, with the exchange rate falling back toward around 140 Yen. Further analysis also warns that if the US economy shows signs of recovery mid-year, carry trade demand could rise again, putting renewed downward pressure on the Yen, and investors should remain vigilant.

Timeline of BOJ policy evolution

To understand Yen forecasts, it’s essential to review key turning points in central bank policy:

Historic shift in March 2024

The BOJ announced the end of its years-long negative interest rate policy, raising the benchmark rate to the 0-0.1% range. This was the first rate hike since 2007, marking the end of an ultra-loose era. However, market reaction was unexpected—rather than appreciating, the Yen continued to weaken as the US-Japan interest rate differential widened further.

Unexpected rate hike in July 2024

The BOJ announced a single rate increase of 15 basis points, raising rates to 0.25%, exceeding market expectations. This decision triggered a massive unwinding of Yen carry trades, with the Nikkei 225 dropping as much as 12.4% on August 5, 2024, causing turbulence across global financial markets. In the short term, the Yen appreciated, but this volatility raised doubts about future policy directions.

Major adjustment in January 2025

The BOJ implemented its largest single rate hike—raising the benchmark rate to 0.5%. This decision was supported by two factors: the March core CPI rose 3.2% YoY, exceeding expectations, and labor negotiations resulted in a 2.7% wage increase. Subsequently, in the first half of 2025, the Yen temporarily strengthened, with USD/JPY falling from 158 back to around 140.

Mid-2025 policy stagnation

From June to October, the BOJ kept rates unchanged at 0.5%. With no new policy signals, the Yen weakened again, with USD/JPY breaking through 150 and continuing to rise.

Key indicators to monitor for Yen exchange rate trends

Investors need to focus on the following four dimensions to make accurate judgments:

Inflation data (CPI)

Consumer Price Index directly reflects inflationary pressures. If inflation continues to rise, the likelihood of the BOJ raising rates increases, which is favorable for Yen appreciation. Conversely, if inflation remains subdued, the BOJ has little urgency to change policies, and the Yen may face short-term pressure. Currently, Japan’s inflation rate is relatively low globally.

Strength of economic growth indicators

GDP growth and PMI data directly influence the BOJ’s policy adjustments. If economic data remain strong, the BOJ has more room to tighten, which benefits the Yen. Conversely, slowing growth will pressure the BOJ to maintain easing, unfavorable for Yen performance. Currently, Japan’s economic growth remains relatively stable among developed countries.

Market interpretation of BOJ officials’ comments

BOJ Governor Ueda Kazuo has recently mentioned the risks of Yen weakness increasing import costs and prices, widely interpreted as signals of potential policy tightening. In the short term, officials’ remarks are often amplified by media, potentially causing market volatility.

Changes in the international policy environment

Since exchange rates are relative prices, the policy directions of other major central banks are also crucial. If the Fed enters a rate-cut cycle, the attractiveness of the Yen will increase. Additionally, the Yen has historically been a safe-haven asset; during geopolitical crises, markets tend to flock into Yen for hedging, which can lead to sharp short-term appreciation.

Key events in the Yen’s decade-long depreciation history

Understanding why the Yen has been weakening long-term requires reviewing major events over the past ten years:

Impact of the 2011 Great East Japan Earthquake

The earthquake and subsequent Fukushima nuclear disaster inflicted huge damage on Japan’s economy. To fund reconstruction and import energy, Japan had to buy large amounts of US dollars for oil, while the nuclear incident hurt tourism and agricultural exports, drastically reducing forex income. This marked the beginning of the Yen’s long-term decline.

Launch of “Abenomics” in 2012

Prime Minister Shinzo Abe proposed an ambitious economic stimulus plan aimed at boosting growth through aggressive monetary and fiscal policies.

Massive easing by the BOJ in 2013

BOJ Governor Kuroda Haruhiko announced unprecedented asset purchase programs, pledging to inject the equivalent of $1.4 trillion into the market over two years. While stock markets reacted enthusiastically, this policy directly caused the Yen to depreciate nearly 30% over the following two years.

Start of Fed tapering in 2021

The Fed announced it would begin tapering asset purchases and hinted at imminent rate hikes. Meanwhile, Japan’s ultra-low interest rates attracted large domestic and foreign investments in carry trades, further intensifying Yen depreciation pressures.

Disillusionment with easing policies in 2023

New BOJ Governor Ueda Kazuo took office, and markets began to expect a policy shift. Coupled with Japan’s CPI rising above 3.3%, reaching a high not seen since the 1970s, expectations of policy change grew, and the Yen started to rebound.

Fundamental policy shift in 2024

This year marked a critical turning point in Japan’s monetary policy. Amid a global trend of easing, the BOJ took the opposite approach, actively adjusting its long-standing easing stance. After two rate hikes in the first half, the Yen temporarily rebounded, but as concerns about Japan’s economic outlook increased, the Yen ultimately failed to reverse its long-term depreciation trend.

Is now a good time to buy Yen? Investment advice

Short-term outlook complexity

Under the dual pressures of widening US-Japan interest differentials and slow policy adjustments, the Yen is unlikely to perform well in the near term. However, this situation cannot last indefinitely; policy shifts will eventually occur.

Long-term optimistic outlook

From a longer-term perspective, the Yen will eventually return to its reasonable valuation level, ending the current oversold state. For investors with actual needs—such as travel, studying abroad, or import trade—consider phased accumulation, diversify entry points, and prepare for future needs.

Advice for trading investors

Those seeking profits in the forex market should craft trading plans carefully based on their risk tolerance and capital. Monitor central bank policies and economic data closely, set reasonable stop-loss levels, and avoid blind trading in volatile conditions. When necessary, seek professional financial advice.

Importance of risk management

Forex market volatility often exceeds expectations, especially during periods of high policy uncertainty. Regardless of strategy, establishing robust risk controls is essential to keep single-loss levels within manageable limits.