Yen Decline Predicted for 2026 Amid BOJ’s Cautious Policy Approach

The outlook for the Japanese yen continues to be bleak as analysts predict a decline by the end of 2026. Recent interest rate adjustments by the Bank of Japan (BOJ) have failed to bolster the currency, leading to concerns about its persistent weaknesses. Strategists from leading financial institutions, including JPMorgan and BNP Paribas, forecast the yen could weaken to 160 per US dollar or even lower in the upcoming years.

Factors Contributing to Yen Decline

• Interest Rate Policies: The BOJ’s gradual approach to tightening monetary policy is seen as insufficient to counteract the currency’s declines.
• Yield Gaps: The significant gap between US and Japanese yields continues to exert pressure on the yen.
• Capital Outflows: Increased investments in foreign assets by Japanese households and corporations are contributing to yen weakness.

This year, the yen managed a modest gain of less than 1% against the US dollar after four consecutive years of losses. Despite this slight improvement, the anticipated shift due to BOJ actions and Federal Reserve cuts has not materialized as expected.

Current Market Conditions

As of now, the yen trades at approximately 155.70—only marginally above its yearly low of 158.87. Analysts highlight that the fundamentals for the yen remain weak. Junya Tanase, chief Japan FX strategist at JPMorgan, holds one of the most pessimistic forecasts, predicting a dollar-yen exchange rate of 164 by the end of 2026.

Concerns linger as inflation in Japan continues to exceed the BOJ’s 2% target, placing additional strains on Japanese government bonds. Market participants are also engaging in carry trades, borrowing low-yielding yen to invest in higher-yield currencies, which complicates any potential recovery for the yen.

Investment Trends and Outflows

• Retail Investments: Japanese retail investors have maintained robust net purchases of overseas stocks, close to ¥9.4 trillion (approximately $60 billion), reflecting a strong preference for foreign assets.
• Corporate Investment: Outward foreign direct investment by Japanese firms is also increasing, driven by multi-year highs in mergers and acquisitions.

Analysts from various financial institutions are cautious, noting that while factors pushing the yen weaker are currently dominant, the potential for a more hawkish Fed and resilient foreign investments could keep the dollar-yen rate elevated. For instance, BNP Paribas projects this rate could reach 160 by 2026.

Political and Fiscal Influences

Political dynamics in Japan also play a role in shaping market expectations. Finance Minister Satsuki Katayama’s recent warnings regarding excessive foreign exchange movements underscore the government’s concern over yen depreciation. However, economist views suggest that mere interventions might not suffice to reverse the current trend.

In summary, while there is a prevailing expectation of continued yen weakness due to structural economic challenges, many analysts believe there could be a potential appreciation in the long term if the BOJ adjusts its policies more aggressively.