Japan – what would turn the JPY around?

In recent years, it wouldn’t have been difficult to find the annual outlook reports that are so popular in December arguing that JPY appreciation is just around the corner. And yet, as we enter 2026, the JPY is as weak as ever.

A big driver is the BOJ being behind-the-curve. In part, that’s deliberate. But the bank also keeps getting cold feet about hiking, first when it tried to turn hawkish in July last year and markets then sold off, and then this year, when it was once again starting to sound more positive, Trump announced his tariffs.

The shocks of tariffs (and, I’d add, the hit to consumer confidence from the sharp rebound in prices from late 2024) is now fading, economic sentiment is clearly improving, and the bank looks set to raise rates at next week’s monetary policy meeting.

But one hike likely won’t be enough to lift the JPY. Markets need to be able to have confidence that the BOJ can lift rates further. That is possible, but a prerequisite I think is a recovery in consumption. I am optimistic about that, but would have more conviction if there was real fiscal help for the household sector.