Japanese Yen Exchange Rate in 2026 Faces "Tearing": Institutional Predictions Differ by 20 Points, What Will Happen to Arbitrage Trading

The USD/JPY volatility in 2025 has been described as a “roller coaster,” with multiple factors such as the Federal Reserve cutting rates, the Bank of Japan raising rates, and political upheavals intertwining. As we enter 2026, the outlook for the yen exchange rate is even more diverse, with institutional disagreements reaching levels rarely seen in history.

How Big Are the Forecast Discrepancies? Nearly 20 Basis Points

Current market opinions on the yen exchange rate can be characterized as “polarized”:

Depreciation camp believes the yen still has room to fall. JPMorgan forecasts USD/JPY will hit 157 in early 2026 and surge to 164 by the end of the year. Barclays’ prediction is slightly more moderate, expecting around 158 by year-end.

Appreciation camp insists there is a rebound opportunity for the yen. Nomura Securities targets a drop to 140 by the end of 2026 (which indicates yen appreciation), while Citibank predicts around 142.

The two extreme forecasts differ by 24 points, meaning that if investors misjudge the direction, losses could be significant. Meanwhile, predictions from Morgan Stanley and Bank of America show a “fall then rise” or “rise then fall” pattern, implying that the yen exchange rate in 2026 will continue to fluctuate.

The Logic Behind Yen Depreciation: Imbalance of Fiscal and Monetary Policies

Institutions bearish on the yen point out that Japan’s new government’s expansionary fiscal policies will continue to weigh on the yen. Although the Bank of Japan has already raised rates, the market generally believes this expectation has been fully priced in, making it difficult for the BOJ to provide effective support for the yen. In contrast, the relative stability of the RMB in East Asia means that yen depreciation also expands Japan’s cost advantage over other Asian competitors.

Barclays specifically notes that the combination of the BOJ’s dovish stance and fiscal expansion makes it difficult to generate substantial support for the yen in the short term.

Where Are the Supports for Yen Appreciation?

Nomura Securities, bullish on the yen, presents two key reasons:

First, inflationary pressures caused by yen depreciation pose political risks to the high government, which may be forced to increase tolerance for rate hikes by the central bank, leading to policy coordination. Second, once USD/JPY approaches the psychological level of 160, market expectations for foreign exchange intervention will rise, and Japanese authorities may intervene to curb excessive depreciation.

Citibank’s bullish logic is more straightforward: the Fed’s continued rate cuts combined with the BOJ’s steadfast rate hikes create enough divergence in monetary policy to support the yen rising to 142.

Key Variables in 2026: Economic Cycles and Policy Shifts

Morgan Stanley’s analysis reveals an important timeline: the US economy may slow down in the first half, causing USD/JPY to fall to 140, but economic recovery in the second half will reignite arbitrage trading (as US bond yield spreads become more attractive), pushing the yen down again to 147.

Bank of America predicts a rapid rise above 160 followed by a gradual decline back to 155, showing a more moderate “dome-shaped” trend.

These divergent forecasts reflect a common risk: increasing uncertainty in global economic growth in 2026. As a safe-haven and arbitrage tool, the yen’s movement essentially reflects market expectations of the global economic cycle and interest rate differentials.

Investment Insights

Whether the yen appreciates or depreciates, volatility in 2026 will be higher than in previous years. Opportunities exist both in shorting (betting on yen depreciation) at high levels and going long (betting on yen appreciation) at lows, but investors must closely monitor three signals: the strength of Japan’s new government’s fiscal policies, the pace of the Fed’s rate cuts, and changes in the BOJ’s tolerance for inflation. The ultimate direction of the yen exchange rate will be determined by the interplay of these factors.