Friends who have been paying attention to the yen’s trend should have noticed it: in early 2026, the Japanese yen still shows no sign of stopping its depreciation. The USD/JPY exchange rate continues to fluctuate between 152 and 160—will the yen appreciate in the short term? Honestly, the market’s views are quite divided.

I’ve noticed that several structural factors are behind the ongoing depreciation of the yen. First is the issue of the US-Japan interest rate differential—US interest rates are still clearly higher than Japan’s. This leads to frequent carry trades, where everyone borrows low-interest yen to invest in US dollar assets, so selling pressure naturally increases. Second is the policy dilemma facing the Bank of Japan: although it raised rates to 0.75% at the end of last year, the pace of rate hikes has been far slower than expected, and the market lacks confidence in further increases. On top of that, the Japanese government’s expansionary fiscal policy—issuing more debt and increasing worries about the deficit—further weighs on the yen.

Uncertainty in the Middle East is adding fuel to the fire. Japan is highly dependent on Middle Eastern crude oil imports. With oil prices remaining elevated, import costs rise directly, the trade deficit widens, and that is clearly unfavorable for yen appreciation. Bank of Japan Governor Kazuo Ueda also made it explicit at the G20 meeting that uncertainty caused by conflicts is keeping global financial markets unsettled.

So, will the yen appreciate? The key still comes down to what the Bank of Japan does next. The market originally expected a rate hike in April, but due to geopolitical risks, the central bank chose to stand pat. What’s interesting is that in its quarterly outlook report, the Bank of Japan raised its inflation forecast and lowered its growth forecast, suggesting that a rate hike in June or July is still possible. According to statistics from market institutions, the probability of a rate hike in June has already risen to 76%, which could become an important turning point.

If the Bank of Japan really raises rates in June—taking the policy rate from 0.75% to 1.0%—the US-Japan interest rate differential would begin to narrow, which would be a positive for yen appreciation. The problem is how quickly the Federal Reserve will cut rates. If the Federal Reserve cuts faster than expected, the interest rate gap could narrow rapidly, leaving the yen with more room to rebound. Conversely, if the Federal Reserve maintains a hawkish stance and the dollar stays strong, the yen’s potential upside for appreciation would be relatively limited.

There’s also the issue of global risk sentiment. As a low-interest-rate currency, the yen is often borrowed for arbitrage when risk appetite is high. If the stock market sees a correction or market panic intensifies, unwinding these arbitrage positions could drive the yen up sharply and quickly. That’s why every time a geopolitical crisis occurs, the yen tends to surge in the short term.

Based on institutional forecasts, JPMorgan’s Japan FX strategy chief, Junya Tanase, holds the most pessimistic view on Wall Street, believing the yen could fall to 164 by the end of 2026. Meanwhile, a strategist at BNP Paribas expects the yen exchange rate to dip to 160 by the end of 2026. Do these forecasts point to yen appreciation in the short term? The answer is not very optimistic—at least until the US-Japan interest rate differential truly narrows, it will be difficult for the yen to perform strongly.

Looking longer term, Japan’s yen can only truly reverse its weak trend through structural reforms within Japan. Only when economic growth momentum improves significantly and the “wage-price” virtuous cycle is firmly established can yen appreciation have a solid foundation. As of now, this process still requires time. Short-term investors can watch the Bank of Japan’s June meeting—that could be an important inflection point. Over the long run, whether the yen appreciates ultimately depends on whether Japan’s economy can truly get out of its difficulties.

For friends who want to participate in foreign exchange trading, you may consider building positions in batches rather than betting everything at once. If you short the yen now, make sure to control your risk, because a policy shift or geopolitical easing could trigger an upside move. If you have travel needs, you can buy yen in installments to meet future spending needs, which also helps diversify exchange-rate risk. In any case, doing your homework and understanding changes in fundamentals is the best way to deal with volatility in FX markets.