Is the Japanese Yen about to appreciate? When will the USD/JPY exchange rate reverse【2026 Investment Guide】

When Will the Yen Turn Its Decline? Will There Be an Appreciation Opportunity Before the End of the Year? In November, USD/JPY broke through the 157 level, hitting a 34-year low, and this depreciation has lasted nearly 10 months. However, based on forecasts from major banks and central bank attitudes, the timing for Yen appreciation may be brewing.

Why Is the Yen Continually Weakening? Analyzing the Core Reasons

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

Widening interest rate differentials caused by policy divergence — Although the Bank of Japan (BOJ) aggressively raised rates to 0.5% in January 2025 (the largest increase since 2007), it then held steady for the following six months. In contrast, the Federal Reserve maintained high policy rates, keeping the US-Japan interest rate spread over 200 basis points. This gap creates significant arbitrage opportunities, with continuous capital fleeing Japan, pushing the Yen lower.

Fiscal outlook concerns — Japan’s proactive government spending, while providing short-term economic stimulus, has heightened market worries about long-term debt sustainability. These concerns further suppress international investor demand for Japanese assets, exerting downward pressure on the Yen.

Three Triggers for Yen Appreciation

Under the current circumstances, three key variables could rewrite the USD/JPY trajectory:

1. Central bank policy signals become the primary focus — If the BOJ establishes a new rate hike path at the December meeting, market expectations for the Yen will immediately shift. According to current market pricing, any clear hawkish stance could trigger a technical cliff-like correction, potentially pushing the exchange rate to 150 or even lower.

2. The Fed’s rate cut cycle begins — As signs of slowing US economic growth become more evident, market expectations for rate cuts are reigniting. If the Federal Reserve proceeds with consecutive rate cuts as expected, the US dollar will lose some of its appeal, and the Yen’s role as a traditional safe-haven currency will become more prominent, serving as a key catalyst for Yen appreciation.

3. Direct intervention in the forex market by authorities — Japan’s Finance Minister recently issued the strongest exchange rate warning since 2022, hinting at government intervention to defend the Yen. If actual intervention occurs, it will drastically alter market expectations in the short term, leading to a sharp decline in USD/JPY.

Major Banks’ Outlook and Future Exchange Rate Predictions

Morgan Stanley’s latest report indicates that USD/JPY is currently significantly detached from fair value. The bank forecasts that, amid US economic slowdown and Fed rate cuts, the Yen could appreciate nearly 10% against the dollar in the coming months. Specifically, as US Treasury yields gradually decline, this deviation is expected to correct in Q1 2026, with USD/JPY falling toward 140.

However, the bank also warns that if the US economy rebounds after mid-year, a new round of arbitrage demand could again push the Yen lower, delaying appreciation. From a technical perspective, USD/JPY only has a true bearish opportunity below 156.70, and there remains potential for testing higher levels in the short term.

Review and Outlook on Central Bank Policy Trends

Over the past two years, the BOJ has undergone historic shifts:

March 2024 — Ended negative interest rate policy, raising rates for the first time in 17 years, to a range of 0 to 0.1%. Market reaction was muted, and the Yen continued to weaken due to the widening interest rate differential.

July 2024 — Raised rates by 15 bps to 0.25%, exceeding expectations and causing a market shock. The Yen plummeted briefly, then rose for four consecutive days. Over the following month, it continued to climb but also triggered large-scale Yen arbitrage unwinding, leading to a global stock market plunge.

September 2024 — Paused rate hikes, maintaining the rate at 0.25%, in line with expectations. Since then, the Yen’s decline has visibly stabilized.

January 2025 — A major turning point, with the benchmark rate increased to 0.5%, the largest single hike since 2007. Factors included core CPI rising 3.2% YoY and wage negotiations yielding 2.7% increases. The rate hike boosted government bond yields, causing the Yen to fluctuate and strengthen against the dollar.

Post-2025 — The policy rate remained at 0.5% for six months, during which USD/JPY gradually climbed above 157, indicating that rate hikes alone are insufficient to offset the US-Japan interest differential. The market is now awaiting further signals from the BOJ.

Variables Investors Should Watch

Inflation CPI trends — Japan’s current inflation rate remains relatively low globally, leaving room for policy adjustments. If CPI accelerates rapidly again, rate hike expectations will strengthen significantly, benefiting the Yen.

Economic growth data — GDP and PMI figures will determine whether the BOJ has room to tighten further. Japan’s economic growth is relatively stable among G7 countries, but a clear slowdown would weaken the Yen’s appreciation foundation.

Global central bank policies — The policy directions of the Fed, ECB, and other major central banks directly influence interest rate differentials. The increasing expectation of Fed rate cuts is currently the most favorable external factor for Yen appreciation.

Geopolitical risks — The Yen has safe-haven characteristics and tends to be sought after during crises. This can cause short-term irrational fluctuations in the exchange rate.

Summary

Although the Yen has faced depreciation pressure for nearly 10 months, the shift in central bank policies, consensus among major banks, and market sentiment suggest that the window for Yen appreciation is opening. In the short term, USD/JPY may test higher levels, but in the medium term (first half of 2026), Yen appreciation has become the mainstream expectation among many institutions.

For those planning to spend in Japan, a phased, buy-on-dips approach is advisable; forex traders should closely monitor the December central bank meeting, Fed policy developments, and potential official intervention signals, as these will be decisive factors for USD/JPY trends. Investors are advised to operate cautiously according to their risk tolerance and seek professional advice if necessary.