Why the Yen Stays Weak Despite 2026 Rate Hikes

A weak yen can persist even if Japan raises interest rates, as long as a rate gap with the United States remains. Market expectations for interest rates and the flow of overseas investment also matter. When buying yen with Korean won, you need to look at both the dollar-yen and won-dollar exchange rates.

The policy rate figures are based on announcements by the U.S. and Japanese central banks in September 2026.

Which exchange rate defines a weak yen?

A weak yen means the yen has fallen in value against another currency. The dollar-yen exchange rate shows how many yen are needed to buy one dollar. When that number rises, the yen falls against the dollar.

The won-yen exchange rate is usually shown as the won needed to buy 100 yen. When that number falls, you can buy yen more cheaply with won. Because the two rates use different reference currencies, they may not move in the same direction.

Reports of a long-term low in the summer of 2026 concerned the yen against the dollar. In an August 3 report, AP said the dollar-yen rate had briefly exceeded 164 yen in July. The same report described this as the dollar’s strongest level in about 40 years. It should not be read as a historic low in the won-yen exchange rate. AP’s August 3, 2026, exchange rate report

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A weaker yen can raise the cost of imported goods for households.

Why is the yen weak even after an interest rate increase?

Exchange rates respond to relative investment conditions, not just the size of Japan’s rate increase. If U.S. rates remain higher, dollar assets retain their interest-rate appeal. Markets also price in expected future rate differences ahead of time.

The Bank of Japan (日本銀行) decided to raise its policy rate on September 18, 2026. Its target for the uncollateralized overnight call rate is around 1.25% per year. The new guideline takes effect on September 24. Bank of Japan announcement of a change in its money market operations guideline

The Bank will encourage the uncollateralized overnight call rate to remain at around 1.25 percent.

Bank of Japan, Change in the Guideline for Money Market Operations, September 18, 2026

This is a target for guiding very short-term interest rates between financial institutions. It does not mean individuals can borrow yen at the same rate. Actual lending rates reflect creditworthiness and the financial institution’s terms.

The U.S. Federal Reserve also decided to raise its policy rate on September 16. Japan’s increase alone therefore does not show that the rate gap between the two countries narrowed substantially. The gap above is a simple comparison of policy rates. It is not the return on an investment in U.S. Treasury securities. Federal Reserve’s September 2026 FOMC statement

An expected rate increase may be reflected in exchange rates before it is announced. If subsequent increases come more slowly than expected, demand to buy yen may weaken. The yen’s weakness after a rate increase alone does not establish that the policy had no effect.

How does the yen carry trade work?

A yen carry trade involves raising funds in low-interest-rate yen. Investors use the borrowed money to buy assets in other currencies that they expect to yield higher returns. Selling yen in this process can put downward pressure on the currency.

But the interest rate difference is not a guaranteed return. If the yen strengthens, the cost of repaying the borrowed yen rises. A fall in the price of the assets held can also cause losses. BIS analyzed how the unwinding of leveraged investments amplified market volatility in August 2024. BIS analysis of carry trade unwinding

• Funding rate: The interest charged on an actual yen loan.
• Investment return: Interest earned on the investment assets and gains or losses from price changes.
• Foreign exchange gain or loss: The gain or loss when converting funds back into yen.
• Transaction costs: Currency conversion costs, fees, and other expenses.

Currency hedging is a transaction that reduces exchange rate risk. But hedging costs also reflect the interest rate difference between the two countries. It is therefore difficult to eliminate exchange rate risk while still capturing the full rate difference. BIS explanation of currency hedging and interest rate differences

Why is the yen weak despite a current account surplus?

Not all of a current account surplus leads to immediate yen purchases. The current account includes interest and dividends from overseas investments. It also includes some profits that overseas subsidiaries retain locally.

The Bank of Japan’s balance of payments FAQ explains how reinvested earnings are treated. Retained earnings at an overseas subsidiary are recorded as income attributable to its parent company. At the same time, they are recorded as reinvestment in the financial account. They are recorded even if no money is sent to Japan or converted into yen. Bank of Japan balance of payments statistics FAQ

Simply subtracting overseas investment from the current account surplus can therefore be inaccurate. The same reinvestment transaction may have corresponding entries in both statistics. To compare them, first align their periods and coverage.

NISA is a Japanese account system that provides tax benefits on investment returns. Which assets the money in those accounts is invested in is a separate question. The entire amount invested through NISA cannot be treated as overseas investment or yen sales. Japan Financial Services Agency’s explanation of NISA

Why is foreign exchange intervention unlikely to change the trend?

Intervention to buy yen directly increases demand for the currency. It cannot, however, eliminate the interest rate gap between the two countries or investors’ long-term outlook. Incentives to sell yen may remain after the intervention.

On August 3, 2026, AP reported confirmation of intervention by both the U.S. and Japan. The dollar-yen rate fell to around 155.20 yen during trading that day. But it is difficult to isolate the effect of intervention from the entire exchange rate change over a given period. Economic data and interest rate expectations can change at the same time. AP report on U.S.-Japan foreign exchange intervention

Japan’s Ministry of Finance (財務省) publishes its own intervention amounts separately. The total for July 30 through August 26, 2026, was 15.3993 trillion yen. That is the Japanese amount for the entire reporting period. It should not be read as the total for one day of joint U.S.-Japan intervention. Ministry of Finance announcement of August 28, 2026

When assessing the effect of intervention, make these distinctions:

• Short-term effect: Check whether it eased sharp exchange rate movements.
• Lasting effect: Check whether interest rate expectations and capital flows changed afterward.
• Scope of the figures: Distinguish estimates from official amounts.
• Participants: Look at the Japanese and U.S. amounts separately.

The relationship between fiscal expansion and rising government bond yields

A rise in government bond yields does not always mean a stronger yen. Its effect on the currency depends on why yields rose. Investors may also demand higher interest rates because of concerns about public finances.

Sanae Takaichi’s (高市早苗) government pursued a reduction in the consumption tax on food. A related bill was also mentioned at a September 17, 2026, press conference. The same press conference explained that funding for the entire measure would be considered alongside budget reforms. There is insufficient basis to conclude that the policy would be funded entirely through government bonds. Japanese Prime Minister’s Office press conference of September 17, 2026

Government targets for encouraging investment must also be distinguished from actual government spending. If private investment is included, the entire amount is not a fiscal burden. The confirmed budget and bond issuance plan are needed to determine how much funding the government will actually raise.

There are also limits to calculating costs by multiplying existing government debt by the increase in interest rates. Interest on fixed-rate government bonds does not change immediately when market rates rise. The burden appears through new issuance and refinancing debt as it matures. Refinancing means replacing maturing debt with new debt.

What else does the Bank of Japan consider?

The Bank of Japan considers economic activity and prices as well as exchange rates. Higher interest rates tend to restrain borrowing and spending. Meanwhile, higher import prices caused by a weak yen reduce households’ purchasing power.

The release version of GDP figures from Japan’s Cabinet Office (内閣府) also matters. The first preliminary estimate of real growth in the second quarter of 2026 was an annualized 1.1%. The second preliminary estimate, released on September 8, revised it to an annualized 1.4%. Growth from the previous quarter was 0.4%. Cabinet Office second preliminary GDP estimate for the second quarter of 2026

An annualized rate converts one quarter’s pace of growth into the rate that would result if it continued for a year. It does not mean the economy grew by that much during the quarter. Assessing the economy also requires details such as consumption and capital investment.

In its September announcement, the Bank of Japan assessed the economy as recovering moderately despite some weakness. It also described the effects of a weak yen and high crude oil prices on inflation. It would therefore be inappropriate to conclude that it cannot raise rates further. Actual policy will depend on subsequent data and forecasts. Bank of Japan’s September 2026 assessment of economic activity and prices

By circumstance: Benefits and burdens of a weak yen

The effect of a weak yen depends on the currencies in which revenue and costs are calculated. Exporters can face higher costs if they use many imported raw materials. The share of production overseas and whether currency risks are hedged also affect the outcome.

Toyota’s earnings forecast cannot be explained by the exchange rate alone. In August 2026, the company raised its annual operating profit forecast by 400 billion yen. Its forecast for the fiscal year ending March 2027 is 3.4 trillion yen. The company’s explanation also includes alternative logistics routes for the Middle East and business improvements. Toyota’s FY2027 first-quarter results explanation

It would therefore be inaccurate to attribute the entire forecast increase to the weak yen. Assessing exchange rate sensitivity requires a separate analysis from the company. An improved corporate profit forecast also does not guarantee a rise in the share price.

Household burdens as seen through real wages

Real wages show the amount of goods and services that wages can buy. Even if nominal wages rise, real wages fall when prices rise faster. A weak yen can contribute to this burden through import prices.

The Ministry of Health, Labour and Welfare’s (厚生労働省) final statistics for 2025 are as follows. They cover workplaces with at least 5 employees. The real wage figures differ depending on the consumer price index used. Ministry of Health, Labour and Welfare’s final 2025 Monthly Labour Survey results

Imputed rent estimates the benefit of living in your own home as though it were rent. It is not money actually paid to a landlord. Whether this item is included makes a difference in the real wage calculation.

The decline in real wages cannot be attributed entirely to the weak yen. Global commodity prices and the size of wage increases also matter. Nor does improvement in a single quarter show whether earlier losses in purchasing power have been recovered.

Calculation example: The difference between 884 won and 950 won per 100 yen

If the exchange rate per 100 yen falls from 950 won to 884 won, you save 66 won. The two rates are comparison figures for the calculation. They are not presented as actual bank exchange rates on a particular date.

The percentage decrease in cost and the percentage increase in yen purchasable are different because they use different starting values. Currency conversion fees are not included in these calculations.

To compare travel costs, use the exchange rate that will actually apply. Cash conversion and card payments may have different costs. If local accommodation costs have risen, the exchange rate benefit may also shrink.

The effect of the won hidden in the won-yen exchange rate

The won-yen exchange rate is affected by movements in the won as well as the yen. The relationship can be calculated using the dollar as a common reference. This assumes rates from the same point in time and on the same pricing basis.

Won per 100 yen = Won per dollar ÷ Yen per dollar × 100

A weaker yen against the dollar alone is therefore not enough to predict the cost of converting travel money. If the won weakens more, the cost of buying yen can rise. Banks’ actual exchange rates also reflect transaction costs.

Common mistakes in articles about the weak yen

When interpreting a weak yen, distinguish what the numbers measure from claims about cause and effect. Policy rates and government bond yields are different indicators, even though both are interest rates. Confirmed changes should also be read separately from estimates of their causes.

If you are preparing to convert currency, check in this order:

1. Decide when you will need the yen and how much you need.
2. Check the bank’s actual exchange rate per 100 yen.
3. Compare the final amount of won you will spend, including fees.
4. Keep money for travel separate from funds invested in the hope of exchange rate gains.