Japanese Yen Outlook for 2026

USD/JPY Performance and Key Drivers in 2025

The US dollar has spent most of 2025 rallying against the Japanese yen. And now there are a lot of questions asked about where we go next. But to really get a grip on where we’re going, let’s review where we’ve been.

You can see that this year has basically been a complete round trip for the US dollar against the Japanese yen. And if we close right around this area, then we’ll either be unchanged or just slightly changed in the exchange rate. But it clearly hasn’t felt like that. We started to see at the beginning of the year a lot of negativity in this pair, as the risk appetite situation around the world was pretty volatile. But let’s take a look at the Federal Reserve. It shifted from tightening to a hold and wait stance, which the markets actually started to frequently price in rate cuts far ahead of reality.

And you have seen that in this pair by a couple of really sharp pullbacks after the recovery in late April. The late April time period is very important to pay attention to because that’s when Donald Trump had suggested that there were going to be massive tariffs on the Chinese, but then reversed his decision, and then from there on out the Japanese yen has lost.

US yields remain structurally elevated, supporting this pair as a yield differential play, while the Bank of Japan continues to take cautious steps towards normalization, but remains far behind its global peers as far as rates are concerned. And the yield curve control that we have in Japan has been softened but not abandoned, keeping Japanese yields somewhat suppressed. Although recently we’ve seen a little bit of volatility in the JGB market, the rate differentials continue to be the dominant driver of this pair. That’s typically the situation here.

And the wide yield spreads between the United States and Japan continue to favor the US dollar. Simply put, if you hang on to this pair in a long position, you get paid. So, had you played the bounce in this market in the middle of April, you’d have been getting paid every day and have seen nominal gains. The economic performance of the United States remains resilient, and sticky inflation kept real yields firm. Treasury yields remain attractive to global capital because, quite frankly, most places don’t offer much of a yield.

Japan’s wage growth has improved modestly, but not enough to trigger aggressive tightening, and inflation shows signs of moderation, reinforcing the caution that the Bank of Japan is showing. In other words, they may do very little. The market behavior has been structurally bullish since the middle of April, as you can see, but there have been really sharp pullbacks.

Yield Differentials Remain the Dominant Force

Most of those pullbacks were driven by intervention threats by the Bank of Japan or risk-off flows into the yen. Temporary yield compression in the United States rallies continues to resume quite quickly as yield spreads reassert control of the market psyche. Traders most of the year looked at dips as buying opportunities, and if you’ve been following me at FX Empire, you know that’s exactly how I’ve been behaving. The long-term trend in this market is bullish, obviously, at least for the last six or seven months.

We still have higher highs and higher lows. And it is worth noting that the key psychological levels acted like a magnet. One such level has been 150 yen. You can see multiple times it was important.

USD/JPY Forecast for 2026

So now that we have the backdrop here, where do we go in 2026? What’s the outlook for all of the key components?

The first one, of course, is the Federal Reserve’s gradual easing, but yields will remain elevated. And I think the keyword here is gradual. I don’t think the Fed’s going to panic, at least not anytime soon. The Bank of Japan may continue to creep towards normalization, but there’s a big question with that. And of course, the yield differentials will remain strongly positive for the US dollar.

Intervention risk is by the Japanese, but I don’t think that’s likely. Inflation in Japan should moderate, limiting some of the Bank of Japan’s urgency. And a short-term driver for this pair, which I think is secondary to yields, will be the risk sentiment of global traders. That’s almost always the case with this pair anyway.

Bullish Scenario

So, let’s lay out both scenarios. The bullish case, which is pretty much my base case, certainly the higher probability, is that yields in the United States remain relatively high despite rate cuts. We’ve already seen that play out. Normalization in Japan remains incremental at best and probably fragile. Global capital continues to favor US dollar assets. I see that in other markets, not just this one, and the carry trade demand remains strong. This is a market that I think continues to grind higher with short-term sharp reversals. In other words, it’s going to behave much as it has over the last three or four months.

Bearish Scenario

The bearish case scenario, which I think is about a 30% chance at this point, is that the U.S. weakens or, for that matter, growth slows sharply, and it compresses yields. I don’t see that happening. I think it’s a very low likelihood. The Bank of Japan accelerates normalization unexpectedly. I think there’s almost no real risk of that. But if we do get a sustained risk-off environment, that does favor the yen. So that is probably the most likely of scenarios that trigger a bearish move.

Coordinated intervention has happened in the past when the yen starts to get too strong or too weak, but I don’t think we’re anywhere near that. The United States dollar would correct lower against the Japanese yen, but likely to remain within a bullish structure longer term. So, I think the bearish case is at best going to be a quarter of the year.

We may see something like that, but overall, I still think without some type of unforeseen external circumstance, the base case scenario is still bullish. Yield differentials, I believe, will remain the primary driver in this pair. Almost every year, that’s the case. It does stay very structurally supported. Pullbacks continue to be temporary and a value that traders can look for. Volatility, of course, will increase right around policy meetings, but again, that’s nothing new.

In 2025, the pair has been driven almost entirely by yield differentials and the Bank of Japan’s reluctance to normalize its policy. Heading into 2026, I think the structural imbalance remains intact, thereby continuing more of the same.

Levels to Watch

A couple of the levels that I am watching from a technical analysis standpoint would be the 158 yen level. If we can break above there, it opens up 160, possibly even 162. Short-term pullbacks, I think, are very likely, but when you look at the last couple of years, we have formed a massive W pattern. Now all we need is something to kick this thing off to the upside.

Another level that I’ll be watching closely is the 153 yen level, because if we break down below there, we may go back to the 150 yen level, which, as I mentioned previously, has acted like a magnet. I would be very interested in buying the dollar down there. It’s almost like getting a redo of the last three or four months.

At this point, I suspect the base case scenario for this is bullish, and traders will continue to look at every short-term pullback as a potential buying opportunity in what I think is one of the easiest pairs to hold on to, especially as you get paid at the end of every session to do so.

For a look at all of today’s economic events, check out our economic calendar.