For most of the past four years, betting on the Japanese yen has been a losing proposition. The currency tumbled from around 110 per dollar in early 2022 to breach 160 in 2024, a decline that eroded Japanese purchasing power and made the country's exports cheaper—perhaps too cheap—on global markets.
But as 2026 begins, currency strategists are increasingly positioning for a reversal. The yen, they argue, may finally be ready for its comeback.
The Case for Yen Strength
The primary driver of any potential yen recovery comes down to one factor: interest rate differentials. For years, the gap between U.S. and Japanese bond yields has overwhelmingly favored the dollar. While the Federal Reserve raised rates aggressively to combat inflation, the Bank of Japan stubbornly maintained its ultra-loose monetary policy.
That divergence is now reversing. The Fed has cut rates three times since September 2025, bringing its benchmark to a range of 3.50%-3.75%. Meanwhile, the Bank of Japan has tentatively begun raising rates, ending years of negative interest rate policy.
"A recovery of the yen versus the euro in 2026 and a larger rally versus the dollar is expected. The rate differentials between the US and Japan will probably narrow."
— ABN AMRO FX Outlook 2026
As the yield gap compresses, one of the main reasons investors borrowed cheaply in yen to invest in higher-yielding dollar assets—the so-called "carry trade"—becomes less attractive. Unwinding those positions could drive yen strength.
What Currency Strategists Predict
Major financial institutions are positioning for yen appreciation. The consensus view suggests USD/JPY could fall from current levels around 156-157 toward the 140-145 range by year-end 2026.
Key forecasts include:
- MUFG: Sees a "post-peak USD world" where the dollar's dominance fades
- ABN AMRO: Expects more dollar weakness ahead, with yen recovery
- Major banks: Generally anticipate 10-15 yen appreciation against the dollar
The bullish yen thesis rests on several pillars:
- Fed cuts, BoJ hikes: Interest rate convergence between the U.S. and Japan
- Carry trade unwind: Trillions in yen-funded positions potentially reversing
- Valuation: The yen remains historically cheap on purchasing power parity measures
- Japanese repatriation: Domestic investors may bring money home as yields rise
Risks to the Yen Bull Case
Of course, currency forecasting is notoriously difficult, and the yen bear case isn't without merit.
First, the Bank of Japan remains far more cautious than the Fed was during its tightening cycle. Any rate hikes are expected to be measured and gradual, potentially disappointing those expecting rapid policy normalization.
Second, Japan's fiscal situation adds complexity. Prime Minister Shigeru Ishiba's cabinet recently approved a record 122.3 trillion yen budget for fiscal 2026—roughly $770 billion—raising questions about long-term debt sustainability. Higher government borrowing could theoretically pressure the yen.
Third, if the U.S. economy proves more resilient than expected and the Fed pauses or reverses its cutting cycle, dollar strength could persist longer than currency strategists anticipate.
Trading the Yen Opportunity
For investors looking to position for potential yen strength, several approaches exist:
Currency hedged Japanese equities: Japan's stock market has performed well, and currency-hedged ETFs allow investors to capture equity returns without yen exposure diluting gains.
Unhedged Japanese bonds: For those bullish on both the yen and Japanese rates normalizing, unhedged bond positions could benefit from both currency appreciation and yield pickup.
Short USD/JPY: The most direct play, though it carries significant volatility and requires active management.
The Bigger Picture
Japan's currency story reflects broader shifts in global monetary policy. The extraordinary divergence between central banks is narrowing as inflation cools worldwide and the Fed joins other major central banks in easing.
For the yen, which has been the poster child of currency weakness during the rate-hiking cycle, the reversal could be equally dramatic when conditions shift.
The yen's 2026 story isn't guaranteed to be one of redemption. But after years of relentless selling, the conditions for a turnaround are more favorable than they've been in years. Currency traders, at least, are starting to bet that Japan's moment has finally arrived.
