Will the USD/JPY exchange rate peak next year? Institutions predict it will fall to around 140 by 2026.

The Federal Reserve’s policy shift is reshaping the USD/JPY exchange rate landscape. Morgan Stanley’s latest analysis indicates that if the U.S. economy’s growth slows significantly, the probability of the Fed continuing to cut interest rates rises to 80%, which could lead to a nearly 10% appreciation of the USD/JPY in the coming months.

Morgan Stanley’s Exchange Rate Forecast Path

According to Morgan Stanley strategists’ assessment, the USD/JPY exchange rate is expected to retreat to around 140 by the first quarter of 2026. As of November 25, the USD/JPY rate stands at 156.60, leaving some room for further downside from the forecast target. Strategists believe that the current exchange rate has deviated from its fair value range. Once U.S. long-term yields continue to decline, it will further depress the reasonable valuation, pushing the USD/JPY lower.

As the year-end approaches and signals of U.S. economic recovery gradually emerge, the demand for arbitrage trading may rekindle, which could exert new downward pressure on the yen in the second half of 2026, with the USD/JPY possibly rebounding to around 147.

Divergence Between Japan’s Policy Stance and U.S. Economic Expectations

The proactive fiscal stance of Japan’s new Prime Minister injects uncertainty into the market. However, Morgan Stanley’s analysis suggests that Japan’s fiscal expansion has not been particularly aggressive. In contrast, the easing of the Fed’s policy is more pronounced — this policy divergence is becoming a key factor influencing the USD/JPY exchange rate.

Additionally, the threat of intervention by the Japanese government has increased the yen’s support level, providing a potential trigger for a future rebound of the yen.

Fund Managers Favor Yen Appreciation Potential

A recent survey of approximately 170 fund managers by Bank of America confirms the market’s optimistic outlook for the yen. About one-third of respondents believe that the yen will be the best-performing major currency in 2026, achieving relative appreciation.

These professional investors generally point out that the yen is currently facing a clear valuation discount. Considering possible market interventions by the government and central bank, as well as the deviation of the USD/JPY rate from fundamentals, the probability of yen appreciation is rising. Market consensus is gradually forming: the turning point for USD/JPY may not be far away.