Title: USD/JPY 2026 Forecast: Sustained Policy Divergence Supports U.S. Dollar Strength
Original article by James Hyerczyk, adapted and expanded
Overview
The USD/JPY currency pair has shown notable resilience and upward momentum, reinforcing the longer-term bullish trend that has defined its performance since 2020. Into 2026, the fundamental dynamics that support the dollar’s strength against the Japanese yen continue to revolve around the differentiated monetary policy stances of the U.S. Federal Reserve and the Bank of Japan. The sharp contrast in policy direction—particularly regarding inflation targeting, interest rates, and yield control measures—suggests a continued bullish outlook for the dollar-yen pair in the medium to long term.
Key Drivers Behind the USD/JPY Outlook
1. Divergent Monetary Policy Trajectories
A major driving force behind the USD/JPY performance continues to be the stark divergence in monetary policy between the United States and Japan.
– The Federal Reserve has steadily pursued monetary tightening in response to persistent inflation, gradually elevating the federal funds rate from near-zero levels to over 5% by 2023. Even though the pace of tightening has slowed, the Fed remains cautious and committed to restoring price stability through elevated interest rates.
– In contrast, the Bank of Japan has maintained a highly accommodative stance. Despite modest adjustments such as loosening the cap on the 10-year Japanese Government Bond (JGB) yield from 0.25% to 1%, its primary policy direction remains geared toward stimulus.
– These divergent paths continue to widen the interest rate differential between U.S. and Japanese government bonds, incentivizing investors to seek higher yields in dollar-denominated assets.
2. U.S. Economy’s Resilience
The strength and flexibility of the U.S. economy have also contributed to the dollar’s dominance against the yen.
– GDP growth in the U.S. has remained more robust than initially forecasted, with consumer demand holding strong and labor markets exhibiting low unemployment.
– The stickiness of core inflation has justified the Fed’s cautious tone, keeping speculation of aggressive rate cuts in check.
– A strong macroeconomic environment reinforces faith in U.S. assets and increases demand for the dollar.
3. Japan’s Struggles With Inflation and Wage Growth
While the Bank of Japan has made minor adjustments in its yield curve control policy, it still faces significant challenges in stimulating consistent inflation and wage growth.
– Inflation in Japan, though elevated by local historical standards, remains below the 2% target on a sustainable basis when excluding volatile items.
– Wage growth remains stagnant, with only modest increases observed in annual labor negotiations, making it difficult for the BoJ to commit to a full-fledged tightening cycle.
– The lack of inflationary pressure minimizes the incentive for the BoJ to abandon its ultra-loose monetary policy, extending the yield and policy gap with the U.S. even further.
4. Technical Perspectives Feed Into Bullish Sentiment
The technical picture of USD/JPY continues to favor the upside, with long-term indicators and price actions aligning with a trend continuation outlook.
– The weekly and monthly charts show higher highs and higher lows since the 2020 bottom, reflecting sustained bullish momentum.
– Support levels near 135.00 and 130.00 have consistently held, providing a strong base for fresh rallies.
– Moving averages across various timeframes (50-week and 200-week MAs) point upward, reinforcing the structural strength of the uptrend.
Institutional Activity and Market Sentiment
Institutional positioning also indicates that the bullish narrative surrounding the USD/JPY pair could persist into 2026. Hedge funds and large financial institutions have shown a preference for long dollar positions, particularly in anticipation of prolonged U.S. interest rate differentials.
– The Commitment of Traders (COT) report regularly shows net long positions in USD/JPY.
– Japanese institutional investors—including pension funds—continue to seek higher returns overseas due to lackluster domestic yields
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