**RBC Forecasts Significant USD/JPY Decline to 120 by End of 2026**
*Based on an article by Tim Clayton, originally published at ExchangeRates.org.uk*
The RBC (Royal Bank of Canada) has recently released a report forecasting a substantial depreciation in the value of the US dollar against the Japanese yen. The bank projects that the USD/JPY exchange rate, which has been trading at elevated levels due to a widening interest rate differential between the United States and Japan, will experience a sustained reversal over the coming years. According to RBC analysts, the pair is expected to gradually fall to around 120.0 by the end of 2026, continuing this trend into 2027.
This long-term forecast reflects a strategic reassessment of the market forces, policy dynamics, and economic fundamentals that have supported the dollar’s strength against the yen in recent years. In this extended analysis, we delve into the main factors behind RBC’s forecast, the broader macroeconomic context, potential policy shifts, and the likely implications for forex investors and the global economy.
## Current USD/JPY Situation
As of September 2025, the US dollar remains strong relative to the Japanese yen, with the USD/JPY pair trading near multi-decade highs. This strength has been driven by several factors:
– **Wide interest rate differential**: The Bank of Japan (BoJ) has maintained ultra-low and even negative interest rates, while the US Federal Reserve has kept rates elevated to combat inflation.
– **Hawkish Fed policy**: The US central bank’s commitment to a tight monetary stance has supported the dollar by attracting substantial flows into US denominated assets.
– **Carry trading activity**: Investors have used the yield differential between US and Japanese assets to engage in carry trades, borrowing in yen and investing in higher-yielding dollar assets.
– **Global risk sentiment**: As a safe haven currency, the yen typically benefits from global risk aversion. However, risk appetite has been relatively resilient, further supporting dollar dominance.
Despite these factors, RBC contends that this tide will soon begin to turn.
## RBC’s Long-Term Forecast for USD/JPY
RBC’s projection envisions a significant trend change in the USD/JPY currency pair, with a marked appreciation for the Japanese yen over the next two years. Their timeline is as follows:
– **End of 2025**: USD/JPY to remain high, potentially consolidating near current levels slightly below 145.0.
– **Mid-2026**: A gradual shift as BoJ policy changes and US yields peak or begin to reverse.
– **End of 2026**: USD/JPY expected to drop to approximately 120.0.
– **2027 and beyond**: Sustained downtrend as the yen appreciates further on fundamental improvements and narrowing policy divergence.
## Key Drivers of the Forecasted Decline
Several crucial macroeconomic and policy forces underpin this anticipated decline in the USD/JPY pair:
### 1. Narrowing Interest Rate Differential
– One of the most fundamental forces supporting the dollar-yen exchange rate has been the significant interest rate spread between US and Japanese assets.
– With the US fighting inflation through aggressive rate hikes, and Japan adhering to accommodative policies, the divergence widened sharply between 2022 and 2025.
– RBC analysts expect:
– The Fed’s hiking cycle has peaked.
– Cuts may begin during 2026 as inflation moderates and growth slows.
– Meanwhile, Japan is projected to incrementally normalize policy.
– RBC believes that even modest hikes from the BoJ can shift market expectations dramatically given the ultra-low base rate.
### 2. Shift in Bank of Japan Monetary Policy
– Under new leadership following the appointment of Kazuo Ueda as BoJ Governor, Japan’s central bank has signaled a gradual departure from extreme monetary easing.
– Actions taken so far include:
– Removal of the Yield Curve Control (
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