Japanese yen: Can the Bank of Japan stop its decline?

Will the Japanese yen finally find support, or will the Bank of Japan struggle to slow its decline? We examine the key forces driving USDJPY and explain why the yen could remain under pressure in the months ahead.

The yen’s ongoing losses since around April 2025 have been a particular focus for many forex traders in recent months amid a new government in Japan and the latest major intervention around Golden Week in late April and early May 2026. Here I'm outlining why I think the yen's losses are likely to continue unless the Bank of Japan (BoJ) starts to hike more quickly. This Japanese yen forecast also considers how monetary policy and inflation could shape the currency's next move.

Why the carry trade still favors the dollar

The current difference in rates between the Fed and the BoJ is relatively low at 2.5-2.75% after the latter hiked its rate to 1% in June 2026 but still favours the dollar quite strongly. Throughout the current conflict in the Gulf, inflation has risen in most major advanced economies, but less so than had been feared around the outbreak of hostilities in late February 2026.

The spread in yields from decade bonds has remained about 1.8-1.9% between the USA and Japan consistently in the week leading up to the BoJ’s meeting on 31 July. It seems very unlikely now that the BoJ will hike rates before September, but depending on the comments after the upcoming statement, the probability of a hike late this quarter might increase.

Summary: 

Unless the Bank of Japan signals a faster pace of tightening, the interest rate gap is likely to keep the Japanese yen under pressure.

Why Bank of Japan intervention hasn't reversed the trend

Japan’s Ministry of Finance (MoF) has conducted several interventions together with the BoJ since 2024. The latest major one was in Golden Week 2026, 29 April-6 May, with a total cost of operations at approximately 10 trillion JPY. Traders generally dismissed this as a failure since the yen resumed its decline from around the middle of May 2026 and dollar-yen in particular reached 160 JPY again on 3 June 2026. However, I don’t think this or any other intervention in the last few years has been a complete failure.

Major interventions to support the yen in the last few years have consistently broken short-term momentum. They certainly seem to have helped avoid a decisive, uncontrolled breakout upward by dollar-yen, which would be difficult to halt if it really gets going. Equally, from the trader’s perspective, any possible future intervention might provide a decent opportunity to sell the yen or add to selling positions assuming the basic, underlying fundamentals don’t change significantly.

Summary: 

Without a meaningful shift in monetary policy, future intervention is likely to slow the yen's decline rather than reverse it.

Why inflation may not force faster Bank of Japan rate hikes

Comments from the BoJ in recent months have repeatedly stressed that the bank might speed up its current tightening in response to the yen’s weakness and upside risks for inflation. I don’t think this scenario is likely to occur because the peak of upside risk to inflation in Japan has probably passed.

Inflation in Japan remained very low in the first half of 2026 compared to other major countries. Source: Trading Economics.

Japanese annual headline inflation has risen since the start of hostilities in the Gulf in February 2026, but hasn’t risen nearly as much as most other major countries, and it remains below target. February 2026 saw the rate at 1.3%, the lowest in about four years; in June, it reached only 1.7%, still below the usual 2% target despite significant shocks in energy markets.

This isn’t to say that inflation can’t continue rising in Japan, but I think that the probability of a sustained, large rise is declining as time goes on. The flow of oil past Hormuz has resumed at least sporadically in the last few months, and with WTI still above 80 USD there’s a fairly strong incentive for other producers to pump more where possible. Equally, Japan’s economy is becoming gradually less dependent on oil as time goes on, so the impact from this crisis has been clearly much lower than the similar situation in the 1970s.

The BoJ could certainly continue to hike, with another hike possible late in the third quarter or early in the fourth. However, a significant increase in the pace of hiking seems too risky to me given relatively low current inflation and lukewarm growth.

Summary: 

For now, subdued inflation gives the Bank of Japan little reason to accelerate rate hikes, limiting support for the Japanese yen.

USDJPY outlook: Is 164 JPY still the next target?

Dollar-yen’s uptrend has continued in summer 2026 so far, although overbought signals and recent news from the Gulf might mean a pause. Source: Exness.

The situation on the daily chart for the USDJPY outlook is consistent with an established uptrend. For the moment, I’m not looking for exhaustion or a reversal since I think the fundamental basis for the trend is strong and unlikely to change soon as described above. Instead, I think the key is finding a relatively lower-risk position to add to buying trades or possibly buy in fresh. This isn’t forthcoming for the moment, with the slow stochastic around 92 giving a very strong signal of buying saturation and Bollinger Bands having only recently stopped signalling the same.

With volume not having dropped significantly so far this summer, I’m expecting a lull in August following the BoJ’smeeting on Friday, 31 July, unless the comments from the board are particularly surprising. A move back to the 20 SMA around 162.60 JPY could give a reasonably good entry, but traders should understand how to trade USDJPY and use both a stop loss and trailing stop to manage risk.

If there is another intervention similar to that in April 2026, that’s likely to be a great intraday opportunity to sell. But I don’t think it’ll mean an ongoing downtrend unless the BoJ shifts policy significantly. This week I’m also watching the Fed’s meeting on 29 July and American advance GDP for the second quarter the next day.

Summary: 

As long as the fundamental outlook remains unchanged, any pullbacks in USDJPY may present buying opportunities while 164 JPY stays within reach.

Final thoughts: What's next for the Japanese yen?

Despite repeated interventions, I believe the Japanese yen will remain under pressure unless the Bank of Japan adopts a more aggressive tightening cycle. For now, the carry trade continues to support USDJPY, making central bank guidance and any signs of future intervention the key catalysts traders should watch in the coming weeks.

Disclaimer: This article is provided for informational and educational purposes only and should not be considered trading or investment advice. Financial markets involve risk, and you should conduct your own research and consider your financial circumstances before making any trading or investment decisions.