The Japanese yen is down 1.1% over the 12 months to 30 October 2026 against a basket of 15 other major currencies, 9th of 16 in the 2026 strength ranking. That's a lot better than in July, when it was last of 16 and down almost 10%. Over three years it is still down 9.7%, 15th of 16.
The short answer for why it got so weak: Japan's interest rate has sat near the bottom of the basket for years, so the yen funded other countries' carry trades instead of attracting them. The short answer for why it's recovering: the Bank of Japan has started raising that rate in earnest.
It's a rate story, not a Japan-crisis story
The Bank of Japan's policy rate is 1.25%, its highest since 1995, but still far below the Federal Reserve (3.75% to 4.00%), the Reserve Bank of Australia (4.60%) or Hungary's central bank (5.50%). A currency that pays little to hold gets sold to fund positions in currencies that pay more. That's different from a currency in crisis: nobody is dumping yen because they've lost confidence in Japan. They borrow yen because it's cheap, and cheap money gets sold, not bought.
The mirror image sits at the top of the ranking. The Norwegian krone (+11.1%), the Australian dollar (+8.9%) and the Hungarian forint (+3.8%) are the top three over 12 months, and all three come with some of the highest rates in the basket. Both ends of the table trace back to the same interest-rate gap.
The gap is narrowing, slowly
The BOJ raised its policy rate twice in 2026: to 1.00% on 16 June and to 1.25% on 18 September. On 30 October it held at 1.25%, with one of nine board members voting for another hike.
The yen's low point of the past year came on 24 July. Since then it has gained 5.3% against the basket. September was its best month since November 2024, up 4.2% (our September review has the details), and for 2026 so far it is up 2.0%, 5th of 16.
October was quieter: the yen slipped 0.3% against the basket and was roughly unchanged against the dollar. Its 12-month figure still improved, from −2.5% in mid-October to −1.1%, partly because a weak stretch from late October 2025 has dropped out of the window. At its 30 October meeting the BOJ said underlying inflation had reached its 2% target and raised its inflation forecasts, which analysts read as a signal that the next hike could come as early as December. The yen held its small gain that day.
The recovery is still fragile. The Fed raised rates two days before the BOJ's September hike, by the same quarter point, and both held in October, so the gap between them is no narrower than it was in the summer. Since 8 September the yen has lost 1.9% against the dollar.
This has happened before. In August 2024 a BOJ hike, combined with other central banks pausing, narrowed the gap fast enough that crowded carry trades had to close all at once, and the yen spiked. 2026 looks different: the BOJ is hiking, but so are others. The Fed, the RBA and Norges Bank all raised rates in September, and the Bank of Canada followed in October. That keeps the gap wide enough for carry trades to keep being rebuilt in the yen.
What would actually turn the yen around
A sustained yen recovery needs the rate gap to close meaningfully, not just narrow at the margins. That means either the BOJ hiking faster than the others, or the Fed and other high-rate central banks pausing or cutting while Japan keeps raising. December will test the first: markets expected both the Fed and the BOJ to hike again after their October meetings. If both move, the gap stays where it is. Until something changes it, the structural incentive (borrow yen, invest in something that pays more) stays in place, and rallies like September's are hard to sustain.
None of this is a signal to trade anything - carry-trade unwinds are exactly the kind of move that's obvious in hindsight and dangerous to time. Treat the rate gap as context for why the yen moves the way it does, not a trading strategy.
How to watch it
- Track the BOJ-Fed rate gap, not just USD/JPY. The gap is the actual driver; the exchange rate is the symptom. Both decide again in December: the Fed on 9 December, the BOJ on 18 December.
- Watch for a sharp, fast yen move rather than a gradual one. That's the signature of a carry-trade unwind, not a fundamental shift.
- Compare the yen against the whole basket on the worldwide dashboard, not just the dollar. Adjusted for inflation, the yen is actually up 0.8% over 12 months, 6th of 16, because Japanese prices are rising more slowly than most of the basket's.
Compare the yen directly: USD vs JPY, EUR vs JPY, or HUF vs JPY. The dollar side of that first pair has its own story: how strong is the US dollar right now?
This article is informational, not investment advice.