Japanese Yen Exchange Rate Trend Analysis for 2026: Will It Drop Further? A Must-Read Guide for Taiwanese Investors

Why Is the Yen Exchange Rate Continually Weakening? A Review of This Year’s Trend

In 2025, the Japanese yen experienced significant volatility. At the beginning of the year, USD/JPY hovered around 160, and by mid-April, it unexpectedly dropped to around 140—a yen appreciation of over 12% in just three months. However, the good times didn’t last long; in the following months, the yen weakened again, and after October, the decline accelerated. In November, the yen broke below 157, hitting a half-year low, drawing global market attention.

By December, the Bank of Japan announced its second rate hike of the year, raising the policy rate from 0.5% to 0.75%, but market reaction was muted—the yen continued to struggle around 156 without much improvement. What economic logic underpins this?

Four Core Factors Behind the Yen’s Weakness

The US-Japan interest rate differential remains the main driver

Although the Bank of Japan has gradually raised rates, the interest rate gap compared to the US remains high. This attracts large-scale arbitrage strategies—borrowing yen cheaply in Japan and investing in higher-yielding US assets—creating persistent selling pressure on the yen. Even with rate hikes, market expectations for future policies remain relatively cautious, making it difficult to effectively boost investor confidence.

Japan’s new government’s fiscal expansion policies

After the new Prime Minister took office in October 2025, large-scale fiscal stimulus measures were implemented to boost economic growth. However, increased government debt issuance and concerns over fiscal deficits emerged, leading markets to worry about Japan’s fiscal risk premium, further pressuring the yen.

The US dollar’s strong position remains intact

The US economy remains relatively resilient, with sticky inflation data. The new administration’s policies favor a strong dollar and impose tariffs, supporting the dollar index. As a low-interest-rate currency, the yen is often sold off during periods of rising global risk appetite, which has been the case over the past half-year.

Weak domestic economic recovery in Japan

Domestic consumption remains sluggish, GDP growth fluctuates, and import-driven inflation pushes prices higher. Despite wage increases, real purchasing power is still constrained. Consequently, the central bank remains cautious about raising rates, unwilling to tighten excessively and harm the economic recovery, indirectly prolonging the yen’s weakness.

The Bank of Japan’s Policy Trajectory Since 2024

March 2024: End of Negative Interest Rate Era

The Bank of Japan made a historic decision to end its years-long negative interest rate policy, raising rates from -0.1% to the 0-0.1% range. This was the first rate hike in nearly 17 years since 2007. Markets expected this to strengthen the yen, but due to widening US-Japan interest rate differentials, the yen continued to weaken.

July 2024: Unexpected Rate Hike Sparks Market Turmoil

The BOJ raised rates by 15 basis points to 0.25%, exceeding market expectations, which triggered a massive unwinding of yen arbitrage trades. Global stock markets plummeted; the Nikkei 225 dropped 12.4% in a single day on August 5. This event served as a stark reminder of the enormous scale of yen arbitrage trading.

January 2025: Policy Shift Accelerates

The BOJ increased rates to 0.5%, a 25 basis point hike—the largest single increase in nearly 18 years. This move was supported by core CPI rising 3.2% YoY in March and autumn wage growth reaching 2.7%. The yen temporarily rebounded, with USD/JPY falling from 158 to 140.

June to November 2025: Rate Hikes Pause, Yen Weakens Again

The BOJ held rates steady at 0.5%. Over time, the US dollar regained strength, with USD/JPY breaking above 150 and continuing upward.

December 2025: Another Rate Hike to 0.75%

The BOJ raised rates to the highest level in 30 years. Although the policy signals were somewhat hawkish, the market did not fully respond, and the yen remained under pressure.

What Will Happen to the Yen Exchange Rate in 2026?

Key Deciding Factors

Clarity of BOJ’s Policy Intensity and Forward Guidance

Market currently expects the BOJ to reach around 1% interest rates by mid- or late-2026. The January meeting will be especially important—if the BOJ signals a more hawkish stance and clearly outlines the rate hike path, it could stabilize the yen; if it remains vague or emphasizes economic risks, the yen will likely stay weak.

Speed of US-Japan interest rate differential narrowing

If the Federal Reserve cuts rates faster due to economic slowdown, a rapid narrowing of the interest gap would benefit the yen. However, the consensus expects a slower pace of Fed rate cuts; if the US economy remains resilient, the dollar may stay strong long-term, limiting the yen’s rebound potential.

Global risk sentiment and arbitrage trading flows

Low-yield yen tends to be borrowed and invested in higher-yield assets when global risk appetite is high, creating selling pressure. If global stock markets decline, arbitrage trades may unwind quickly, causing the yen to appreciate sharply. Conversely, stable global markets will continue to exert capital outflows from the yen.

What Wall Street Thinks

Major investment banks are generally bearish on the yen’s outlook for 2026. JPMorgan’s FX strategist predicts the yen could fall to 164 by the end of 2026, citing Japan’s weak fundamentals and lack of structural improvement, with cyclical factors possibly turning negative.

BNP Paribas’ Asia FX strategist forecasts a dip to 160 by the end of 2026. She notes that the global macro environment next year may still favor risk assets, which supports ongoing arbitrage trading. Considering cautious central bank actions and potentially more hawkish Fed stance, USD/JPY is expected to remain high.

Indicators to Monitor for Yen Trend

If you want to assess the yen’s future direction yourself, these indicators are worth paying attention to:

Inflation (CPI)

Inflation reflects economic conditions. If Japan’s inflation continues rising, the BOJ may accelerate rate hikes, supporting the yen; if inflation cools, the BOJ’s tightening momentum weakens, and the yen may face short-term pressure. Currently, Japan remains one of the countries with relatively low inflation globally.

Economic Growth Data

GDP and Manufacturing PMI are especially important. Strong data suggest more room for tightening, which is positive for the yen; weak data imply the BOJ needs to continue easing, which is negative for the yen.

BOJ Officials’ Statements

Comments from BOJ Governor Ueda Kazuo are often amplified by markets and can drive short-term yen volatility. Pay attention to their stance on policy trajectory and economic outlook.

Global Policy Environment

Central bank moves worldwide influence relative exchange rates. Fed rate cuts tend to favor the yen, and vice versa. Additionally, the yen has traditionally been a safe-haven currency—during geopolitical risks, investors tend to buy yen for safety.

The Decade of Yen Depreciation: Historical Context

Understanding why the yen has been weakening over the past decade helps grasp long-term trends:

2011 Earthquake and Nuclear Crisis

The Great East Japan Earthquake, tsunami, and Fukushima nuclear disaster caused massive economic damage. Japan had to import more oil to meet energy needs, increasing dollar purchases; fears over radiation also hurt tourism and exports, reducing forex income, and the yen started weakening.

End of Abenomics in late 2012

The new Prime Minister introduced the “Abenomics” three-arrow policy.

2013: Massive BOJ Easing

Along with reforms, the BOJ launched unprecedented asset purchases (QE), injecting about $1.4 trillion worth of liquidity over two years. While stock markets surged, the easing led to nearly 30% yen depreciation over two years.

2021: Fed Tapering Begins

After signaling tapering, the Fed started tightening. Meanwhile, Japan’s ultra-low borrowing costs attracted arbitrage trades—investors borrowed yen to invest in high-yield overseas assets. During global economic recovery, the yen faced significant depreciation pressure.

2023: Rising Inflation and Shift Expectations

New BOJ leadership hinted at possible policy adjustments. Japan’s CPI exceeded 3.3%, reaching a high not seen since the 1970s, prompting market expectations of a gradual policy shift.

2024: Policy Shift Confirmed

The BOJ raised rates in March and July to 0.25%, ending the easing era. This year marked a crucial turning point in Japan’s monetary policy.

Summary

In the short term, the yen will find it difficult to break through resistance; the widening US-Japan interest differential and insufficient policy tightening remain main drag factors. However, from a long-term perspective, the yen will eventually revert to a reasonable valuation, ending its continuous decline. Investors with travel or Japanese consumption plans may consider gradually buying yen to meet future needs; those aiming to profit from forex trading should combine their risk tolerance and financial situation to develop prudent risk management strategies, closely monitor the indicators mentioned above, and adjust their investment decisions accordingly.