The Market is not ready to save the Yen

EUR/JPY

Key zone: 183.00 - 184.50

Buy: 185.00 (on strong positive fundamentals); target 187.50; StopLoss 184.30

Sell: 182.50 (after retesting 183.50) ; target 181.00-180.50; StopLoss 183.20

The yen does look extremely cheap in real terms. But that does not mean the market is obliged to immediately return it to some theoretical “fair value.” Currency imbalances indicate the potential direction of a long-term move, but the timing of a reversal is determined by entirely different factors: interest-rate differentials, carry trade returns, capital flows, energy prices, and the Bank of Japan’s willingness to tighten monetary policy.

There is no catastrophe yet. But several unconventional indicators suggest that the Japanese currency has lost so much purchasing power that the potential for its long-term appreciation looks substantial.

Let’s recap:

Following the largest coordinated U.S.-Japan currency intervention in 15 years, the yen remains in the spotlight. Authorities intervened after the Japanese currency fell to a 40-year low against the dollar. Since then, the yen has already given back roughly half of the gains achieved after the intervention.

The so-called Katsu Curry Index is particularly revealing. Analysts at Bank of New York compared the cost of the popular Japanese dish katsu curry (rice with a pork cutlet and curry sauce) with its price in other countries and calculated a theoretical fair value for USD/JPY. The result is striking: the market values the dollar at roughly ¥159, while the katsu-curry purchasing-power model implies a rate of around ¥62.18.

This is not a USD/JPY forecast and not a ready-made trading signal. But the indicator clearly demonstrates the scale of the yen’s loss of purchasing power.

A weak currency directly increases the cost of fuel, food, raw materials, equipment, and imported consumer goods. The Bank of Japan notes that exchange-rate pass-through into final prices has become stronger than before: companies now have greater scope to raise prices and wages simultaneously.

And if even familiar staples such as katsu curry or ramen start becoming too expensive for Japanese consumers, political pressure for a change in economic policy inevitably intensifies.

In June 2026, the REER calculated by the BIS using trade weights and relative inflation fell to 65.30, with 2020 set at a base level of 100. In other words, the yen was 34.7% below its base-year level and roughly 11.8% cheaper than a year earlier.

REER can show that a currency is cheap, but it cannot tell you when it will become expensive. Moreover, balance-of-payments models have yet to confirm such an obvious degree of fundamental undervaluation.

That is why buying the yen simply because it is “cheap” is a poor trading strategy. A genuine reversal requires a catalyst, and until one appears, the market will continue to ignore the yen’s extreme fundamental cheapness.

• In its July outlook, the BoJ’s median forecast for inflation excluding fresh food in fiscal 2026 is 2.5%. The central bank expects the same reading for inflation excluding fresh food and energy. At the same time, inflation risks are assessed as tilted to the upside.
• The BoJ explicitly indicates that it will continue raising rates as its baseline scenario materializes.
• At the same time, high oil prices are worsening conditions for Japanese companies and eroding households’ real incomes. Yen weakness further increases import prices and hits small and medium-sized businesses particularly hard.
• Global Japanese corporations are in the opposite position: they benefit from the currency translation of overseas revenues.

This creates an uncomfortable dilemma: an excessively weak yen helps exporters, but at the same time drives up the cost of living at home.

So, what does this mean?

The market can remain irrational far longer than a trader can hold a position.

If USD/JPY starts falling while EUR/USD rises at the same time, EUR/JPY will decline much more slowly than one might expect based solely on yen dynamics. Therefore, trading the Japanese currency requires monitoring both the dollar and European components simultaneously. For now, the key range remains 184.57–188. A decisive breakout above 188 would change the picture and signal that the market is once again ready to aggressively buy the dollar against the yen.

For traders, the important question right now is not “how much should the yen be worth?” but “what will make the market start buying it?”

Until there is an answer, you can sympathize with the cheap yen, but it is still too early to buy it.

So we act wisely and avoid unnecessary risks.

Profits to y’all!