Yen Weakness Continues: Analysts Predict Further Decline to $1.64 by 2026
The outlook for the Japanese yen remains significantly bearish, according to a growing chorus of financial strategists, with forecasts pointing to a sustained decline towards levels of 160 or even beyond against the US dollar by the end of 2026. This pessimistic assessment is driven by a confluence of factors, including persistently wide yield gaps between Japanese and US bonds, stubbornly negative real interest rates maintained by the Bank of Japan (BOJ), and ongoing capital outflows from the country. Key institutions, such as JPMorgan Chase & Co., BNP Paribas SA, and Goldman Sachs Group Inc., are wagering on the yen’s weakness persisting, expecting it to trade around 155.70 currently, closely mirroring its performance from the start of the year.
Despite four consecutive years of declines against the greenback prior to this year, the yen has only managed a modest gain of less than 1% through 2024, illustrating the significant headwinds it continues to face. Initial hopes for a turnaround fueled by anticipated BOJ rate hikes and Federal Reserve cuts ultimately proved premature. The currency’s brief surge past 140 per dollar in April was swiftly curtailed by uncertainty surrounding Donald Trump’s tariff policies and rising fiscal risks stemming from shifts in the political landscape within Japan. The immediate future presents a similar outlook, with overnight index swaps indicating the BOJ is unlikely to accelerate its rate adjustments significantly, with the next hike not fully priced in until September. Furthermore, inflation, still exceeding the central bank’s 2% target, continues to exert downward pressure on Japanese government bonds, keeping real interest rates deeply negative – a core driver of the yen’s weakness.
The resurgence of carry trades further exacerbates the situation. Investors are increasingly borrowing the low-yielding yen to invest in higher-yielding assets, such as the Brazilian real or Turkish lira, a strategy that has become increasingly attractive given the yen’s low returns. Leveraged funds have demonstrated the most bearish stance on the currency since July 2024, maintaining these positions through December 9th, and they represent a significant portion of the overall market sentiment. Global macroeconomic conditions also play a key role in supporting carry strategies. Parisha Saimbi, EM Asia FX and rates strategist at BNP Paribas, anticipates “relatively supportive conditions for risk sentiment,” generally favoring carry trades, and projects the dollar-yen to reach 160 by the end of 2026. This outlook is reinforced by the expectation that the BOJ will maintain a cautious approach to policy normalization, while the Federal Reserve may continue with gradual rate adjustments, creating a divergence that will maintain elevated levels for the dollar-yen pair.
Beyond immediate policy considerations, structural factors remain deeply entrenched. Japan’s outbound investment flows continue to be a substantial drain on the yen. Retail investors have maintained a strong preference for foreign assets, evidenced by net purchases of overseas stocks via investment trusts hovering near a decade-high of ¥9.4 trillion ($60 billion). This trend, analysts believe, is likely to persist into 2026. Moreover, corporate outflows have proven to be a durable driver of yen weakness. Japan’s outward foreign direct investment has continued at a steady pace in recent years, largely unaffected by cyclical factors or rate differentials. BofA Securities chief Japan FX and rates strategist Shusuke Yamada noted significant multi-year highs in outward M&A volumes by Japanese firms. The weak yen situation, therefore, is not expected to shift any time soon, with the BOJ’s reluctance to aggressively hike rates and maintain negative real interest rates as the primary key factors. Tohru Sasaki, chief strategist at Fukuoka Financial Group Inc., agrees, predicting the dollar-yen pair will reach 165 by end-2026.
The growing interest in potential government intervention adds another layer of complexity. Japanese officials, including Finance Minister Satsuki Katayama, have issued warnings against speculative FX moves, particularly as the yen trades near levels that previously triggered intervention. However, analysts generally agree that outright intervention alone is unlikely to reverse the currency’s downward trajectory. Wee Khoon Chong, senior APAC market strategist at BNY, highlights the persistently jittery and volatile market conditions and emphasizes that “smoothing” operations might not be enough to alter the yen’s depreciation trend. The near-term focus remains on the government’s forthcoming fiscal strategy.
Bloomberg Businessweek articles, including those detailing the ongoing shock of Trump’s cocaine kingpin pardon, the destructive impact of private equity on a beloved fly-fishing brand, China’s EV battery giant searching for a new path, and the unfolding US-China dynamic in the toymaking industry, underscore broader global economic and geopolitical factors that could influence the yen’s direction, alongside the core, structural issues.
