USD/JPY in the Second Half of 2026: Will the Yen's Strength Continue?

Financial markets in the second half of 2026 face a convergence of factors — the Japan-US interest rate gap, oil prices, geopolitics, and the US midterm elections — making the overall direction difficult to call.

In early September, USD/JPY fell from around ¥160 to around ¥153. Behind the move are expectations of further Bank of Japan (BOJ) rate hikes and rising yields on Japanese government bonds (JGBs).

When yen interest rates rise, the appeal of the "yen carry trade" — borrowing yen to buy higher-yielding currencies — diminishes. If unwinding of these positions drives further dollar-selling and yen-buying, the yen could strengthen further.

At the same time, Japan's 10-year JGB yield is approaching 3%. While higher rates are yen-supportive, they also increase the interest burden on the government, businesses, and households. If concerns about the economy or financial markets make the BOJ more cautious about additional hikes, the yen could weaken again.

Oil prices are another key variable. Lower crude prices would ease Japan's import costs — a yen-supportive factor. However, if falling inflation reduces expectations for BOJ rate hikes, that would work in the opposite direction and could weigh on the yen instead.

Conditions That Could Drive Further Yen Strength

• The BOJ signals additional rate hikes
• Japan's long-term interest rates rise
• Expectations build for US rate cuts
• The unwinding of yen carry trades continues

Conditions That Could Bring the Yen Back to Weakness

• US inflation and long-term interest rates rise
• Expectations for Fed rate cuts recede
• The BOJ holds off on further hikes
• Oil prices rise on worsening Middle East tensions

September through November tends to bring larger price swings, driven by remarks from Japanese and US officials and the US midterm elections.

For now, rather than committing to a single directional call on USD/JPY, this is a period to watch Japan's and the US's 10-year government bond yields, BOJ and Fed commentary, and oil prices together.

This article is for informational purposes only and does not constitute a recommendation to buy or sell any financial product. Market outlooks and figures are based on information available at the time of writing.