The collapse of the Japanese yen to nearly 40‑year lows in 2026 has been driven by the Bank of Japan’s ultra‑loose monetary policy rather than fears of a fiscal crisis, according to an analytical report by BCA Research. Analysts expect pressure on the currency and government bonds to persist through the end of the year, but they warn investors that the bottom is yet to come this winter. So, speculators should not rush to buy up the yen now.   

According to the report, traditional interest‑rate differentials no longer fully explain the yen’s weakness. With a real policy rate around –0.75%, the Japanese economy is showing clear signs of overheating. Annual wage growth has exceeded 5% for the third consecutive year, and corporate loan growth reached 5.7% in June, the highest rate in 30 years, excluding pandemic anomalies.

In a low‑volatility market environment, this policy has sparked a carry‑trade boom: investors are borrowing cheap yen en masse to buy higher‑yielding assets. The accumulation of record speculative short positions creates a high risk of a sharp yen appreciation should Tokyo intervene in FX markets or market turbulence spike.

BCA forecasts that headline inflation in Japan will reach 2.7% and core inflation 3.1% by June 2027. Faster price growth will inevitably force the central bank to tighten monetary policy. This would support the yen and lead to a flattening of the government‑bond yield curve.

In light of these expectations, BCA has adjusted its investment strategy. The firm booked a 1.4% loss on its short USD/JPY positions and replaced them with short positions on the CHF/JPY cross. Japanese banks have been moved to “neutral”: despite the current rise in yields, the coming policy shift could sharply compress their net interest margins.

BCA rules out the risk of sovereign default. Japan’s massive public debt is offset by a current account surplus, an enormous stock of foreign assets, and a steady decline in the net‑debt‑to‑GDP ratio.