Why is JPY at record lows, and what are the projections for the next year?

USD/JPY, which is considered one of the major currency pairs, has reached levels not seen in decades, prompting investors and policymakers to question what lies ahead. As of July 2025, the yen is truly in a bad shape when compared to the U.S. dollar. The pair has been moving sideways, where it has tried to break out several times. At the core of the yen's weakness is the Bank of Japan’s (BOJ) ultra-loose monetary policy, coupled with a not-so-strong domestic economy. Let’s analyze the JPY currency to conclude what caused it to be so fragile and how investors can capitalize on this weakness. 

JPY weakness background

When converting Japan yen to dollars, you will immediately notice that you need lots of yen to buy 1 dollar, which is not a coincidence. The yen’s weakness has deep roots. Most of the time, the BOJ (Bank of Japan) kept interest rates near zero despite global banks raising rates to combat inflation. Low interest rates boosted Japan’s export of cars and other products, enabling foreigners to buy Japanese products cheaper, while boosting domestic sales. By mid-2024, the yen’s real effective exchange rate hit a 37-year low (the nominal USD/JPY rate). This has been going on for decades and has enabled local investors to invest overseas in US stocks. As a result, the carry trade strategies become very popular as well as profitable. These lower rates made the overall Japanese economy stronger while the yen suffered. But since the benefits outweigh the risks, interest rates were near zero, which is almost unprecedented in the global economic landscape. 

Drivers of record-low JPY

When we observe BOJ’s interest rates versus other major economies such as the USA, the difference is significant. For example, the BOJ maintains interest rates near zero, while the U.S. yields are around 4%. So, if you could borrow money in Japan and invest in the USA, you would generate trade profits. This wide gap encourages capital flow into the dollar and away from the yen. As a result, yen holders are motivated to exchange their money into dollars. This fuels an uptrend of the USD/JPY currency pair, meaning more and more yen are required to buy just 1 dollar. 

These low interest rates contradict what we see globally right now, where rates tend to be higher and rising. The BOJ downgraded its growth and inflation forecasts, caused by weak domestic demand and export concerns. The uncertainty around global trade, which is mainly caused by U.S. tariffs, has heavily weighed on the Japanese economy. Ongoing U.S.-Japan trade uncertainty and lack of decisive BOJ communication amplify market fears, creating further downward pressure on the yen. This trend is only counterbalanced by the weak U.S. dollar as a result of all the tariffs. 

Projections for 2026

There are several scenarios for the JPY in 2026. If the central bank tightens interest rates, then we should expect a bullish yen, and USD/JPY could start to go lower. If the BOJ decides to hold steady on its rates and the Fed stays hawkish, then USD/JPY will most likely continue to rise. Apart from these scenarios, the JPY could experience shocks and extreme volatility due to external shock triggers caused by major geopolitical shifts like the end of wars and new conflicts across the globe, as 2025 seems a year of conflict. If everything goes smoothly and interest rates are not changed in a major way, then we should expect USD/JPY to continue its current trend, and similar tendencies should be true for other currencies traded against the Japanese yen. 

The bottom line

The Japanese yen has been weakening for some time now, which is a direct result of the BOJ’s policies, which refuse to hike interest rates to combat inflation. Instead, BOJ maintains low interest rates to boost the economy and overseas investing, enabling businesses and investors to generate considerable revenue over several decades. These policies made the yen weaker than other major currencies. In 2026, the direction of USD/JPY will depend on whether the BOJ finally shifts stance or chooses to stay the course. The most likely scenario is that the yen will continue to remain weak as the BOJ maintains lower interest rates.