The mystery of the yen's continued depreciation despite narrowing interest rate gap between Japan and the US

SelfStaking · 2026-04-07T10:50:33+00:00

The Japanese yen continues to depreciate as interest rate differentials narrow, overturning traditional consensus. Although the Bank of Japan is expected to raise interest rates, the USD/JPY exchange rate remains stable around 155 yen, revealing complex and changing market dynamics.

SelfStaking

2026-04-07 10:50:33

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The conclusion in the FX market that “a narrowing interest-rate differential leads to JPY appreciation” has already stopped working. Since 2025, the U.S. has cut interest rates while Japan has raised them, and the interest-rate spread between Japan and the U.S. has narrowed to roughly the lowest level in about three years. However, the yen exchange rate has still held near 155 yen per $1, basically unchanged from the beginning of the year. Where, then, is the key to this “puzzle” of the yen continuing to depreciate in a period when the interest-rate differential is narrowing?

The Bank of Japan will hold a monetary policy meeting on December 18–19 to discuss raising the policy rate. Market expectations put the probability of a rate hike at as high as 95% for the December meeting.

At the U.S. Federal Open Market Committee (FOMC) meeting held in December, the Federal Reserve Board (FRB) decided on three consecutive rate cuts. If the Bank of Japan decides to increase rates, the policy-rate differential between Japan and the U.S. will fall to the smallest level in about three years. At present, the actual interest-rate differential has narrowed to the lowest level in about two and a half years. Generally speaking, a narrowing of the interest-rate differential caused by Japan’s rates rising and the U.S.’s rates falling should lead to JPY appreciation versus the dollar.

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The Japan Economic News agency and the Financial Times merged in November 2015 to become part of the same media group. The alliance between the two newspaper companies—both founded in the 19th century—of Japan and the U.K., which has been operating under the banner of “high-quality, the strongest economic journalism,” is advancing cooperation across a wide range of areas, such as joint special features. This time, as part of that effort, the two newspapers are exchanging articles between their Chinese websites.

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