Why the Japanese yen remains so weak?

The yen has continued to weaken — the worst-performing G10 currency since Prime Minister Sanae Takaichi took office — as her commitment to loose fiscal policy and the BoJ’s decision to delay a rate hike have revived comparisons with early Abenomics and reinforced downside pressure. Capital Economics’ Jonas Goltermann calls the persistence of the slide puzzling because expected rate differentials have actually shifted in the yen’s favour; he attributes the gap mainly to exceptionally low real Japanese rates and carry‑trade positioning rather than fiscal fundamentals, noting Japan’s small fiscal surplus and improving current account. The yen is now deeply undervalued (real trade‑weighted lows not seen since the 1970s and extreme on PPP measures), but a sustained recovery will require a meaningful catalyst — intervention would be temporary, whereas a BoJ‑led normalisation against a backdrop of global easing (Capital Economics’ base case) or a global downturn could drive a reversal; the firm forecasts USD/JPY around 150 by year‑end and about 140 by end‑2026.

Analysis

The yen has continued to weaken and is the worst-performing G10 currency since Prime Minister Sanae Takaichi took office in early October, a move the article links to her commitment to continued loose policy and the BoJ’s decision to delay its next rate hike. Capital Economics’ Jonas Goltermann calls the persistence puzzling because expected rate differentials have shifted in the yen’s favour recently despite the slide, reflecting that conventional interest-rate dynamics alone do not explain the depreciation.

Key drivers identified are exceptionally low real Japanese rates and carry-trade positioning that encourages borrowing in yen to fund higher-yielding assets abroad; positioning is not as stretched as last year but is still a contributor. Fiscal concerns are described as a weaker explanation because Japan currently runs a small fiscal surplus, terms of trade have improved since the 2021–22 shock, and the current account is back to a large surplus.

The yen is deeply undervalued on real trade-weighted and PPP measures—at levels not seen since the 1970s—but Capital Economics warns that only a strong catalyst (e.g., intervention, a global downturn forcing easing, or materially faster BoJ normalisation) will trigger a sustained rebound. The firm’s base-case forecasts USD/JPY around 150 by year-end and about 140 by end-2026, and the article notes intervention would likely be temporary while positioning and macro shocks could cause rapid moves.

Key Decisions for Investors

• Trim unhedged long-JPY exposure and avoid adding large directional JPY shorts given deep undervaluation and the potential for abrupt mean-reversion, Consider using option hedges (e.g., JPY call spreads) or variance protection to guard against a rapid appreciation toward the 140–150 range flagged by Capital Economics, Monitor BoJ communications, JGB yields, and positioning metrics closely as primary catalysts for a sustained JPY move—material tightening guidance from the BoJ or a global growth shock would change the outlook, Size carry-related positions conservatively and set explicit stop/hedge rules because carry unwinds and occasional interventions have historically produced sharp, fast FX moves