Is a major reversal in the Japanese Yen imminent? The market bets on a rise of over 10% by 2026, with the exchange rate expected to approach 140.

The recent yen trend has attracted market attention. As the Federal Reserve shifts to a dovish stance, market expectations for a rate cut in December have risen to 80%, creating conditions for the yen to appreciate. According to the latest survey, most investment institutions are re-evaluating the value of the yen.

Bank of America Fund Managers Optimistic About the Yen, Expect It to Be the Strongest Currency Next Year

The latest November survey by Bank of America shows that among approximately 170 fund managers interviewed, one-third believe the yen will outperform other major currencies in 2026. These professional investors generally view the yen as currently undervalued, and with possible interventions by the Japanese government and central bank, the yen’s exchange rate is expected to turn upward.

Morgan Stanley Forecast: USD/JPY Will Face Depreciation Pressure

Morgan Stanley’s strategists have provided more specific forecast data. The bank states that if the Federal Reserve continues to cut rates amid worsening signs of the U.S. economy, the USD/JPY exchange rate could rise close to 10% in the coming months, meaning the yen could appreciate by up to 10%.

As of November 25, the USD/JPY exchange rate was 156.60, having pulled back from previous highs. Morgan Stanley predicts that the rate will further decline to near 140 in the first quarter of 2026; subsequently, it may rebound to around 147 by the end of the year.

Morgan Stanley strategists, including Matthew Hornbach, pointed out: “The current exchange rate is far from fair value. Once it reverts to a reasonable valuation, the USD/JPY in the first quarter of 2026 will face downward pressure—mainly because declining U.S. yields could lower the fair value.”

The Logic Behind Yen Appreciation: Diverging Monetary Policies and Reversal of Arbitrage Trades

Analysts believe that the intrinsic logic behind the yen’s appreciation lies in the ongoing divergence of monetary policies between Japan and the U.S. Japan is implementing active fiscal policies, but these are not particularly expansionary. Conversely, signs of a slowdown in the U.S. economy are becoming more evident, forcing the Federal Reserve into a rate-cutting cycle.

Morgan Stanley also pointed out that as expectations for U.S. economic recovery in the second half of next year heat up, demand for arbitrage trades will rise accordingly. This could pose a new downward pressure on the yen, but the upward trend prior to this has already become market consensus. The reversal of the yen’s trend also reflects the process of global investors re-pricing currency valuations.