FX Snapshot

What’s Up With USDJPY? Factors Extending The Rally To Fresh Multi-Decade Highs

The long term rally in USDJPY has been significant, and recent gains have delivered a push Global FX Strategy to fresh multi-decade highs reaching levels last seen in 1986. The rally has been primarily Global FX Strategy driven by a material deterioration in Japan’s terms of trade, reflecting commodity price gains that followed the outbreak of the Russia/Ukraine conflict in 2022 with pressures that FX SNAPSHOT have since intensified on the back of the recent surge in tensions between the US and Iran. July 27, 2026 Japan is a major commodity-importing economy and has suffered considerably as a result of the rally in a broad range of commodity prices including oil, liquified natural gas (LNG), Analyst Team and coal. Terms of trade reflect the prices of an economy’s exports minus the prices of its imports, and Japan’s exports are largely dominated by manufactured goods including Shaun Osborne autos, industrial machinery, and electrical equipment—goods that have been subject to Chief FX Strategist intense global competition and a resurgence in protectionist measures over the last decade or so. Japan’s trade balance has been decimated by the surge in commodity prices. The country Eric Theoret consistently ran healthy surpluses over nearly three decades from the early 1980s into the FX Strategist financial crisis of 2008, and has since delivered steady deficits from the 2010s onward. Japan maintains a current account surplus, owing to a sizeable net international investment position that delivers positive returns on its overseas investments. However, this balance is also at risk as the country grapples with structural changes in trade. Monetary policy has played an equally detrimental role in driving a good portion of the yen’s weakness. The BoJ maintained a near-zero policy rate from the mid-1990s and left rates in negative territory until 2024—well after the Fed lifted rates above 5% in the 2022/2023 tightening cycle. Interest rate differentials have recovered somewhat over the past three years, however the BoJ continues to maintain its policy rate well below its developed economy peers. The BoJ also appears incredibly reluctant to tighten, despite significant inflationary pressures, owing to macroprudential concerns tied to the Japanese economy’s ability to adjust to tighter policy following a multi-decade period of near-zero interest rates. For USDJPY, the rally from its October 31, 2011 record low just above 75 reflects a 52% decline in the yen. The 160 level was defended earlier this year with intervention from the Ministry of Finance, however subsequent USDJPY gains have been met with very little resistance (beyond verbal threats). The longer-term chart offers little in terms of resistance from here, given the swift pace of the 1985-1988 decline from ~250 to the low-120s.

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