Is the Japanese Yen's appreciation coming? Morgan Stanley predicts the exchange rate will reverse to 140 by 2026

The divergence in policies between the Bank of Japan and the Federal Reserve is becoming a major driver in the foreign exchange market. As Japan’s new Prime Minister, Sanae Takaichi, implements an active fiscal policy, and the Federal Reserve faces signs of economic slowdown and has to cut interest rates, the USD/JPY exchange rate pattern has experienced a clear shift.

As of November 25, the USD/JPY quote is 156.60, showing signs of a pullback from earlier highs. Recent dovish remarks from Fed officials have further boosted market expectations of a December rate cut to 80%. Against this backdrop, Wall Street is beginning to reassess investment opportunities in the yen.

What Morgan Stanley thinks about the future trend of the yen

Morgan Stanley’s strategic analysts have presented an intriguing forecast: if the Fed continues to cut rates amid worsening signs of economic slowdown, the appreciation of the yen against the dollar could approach 10%. The logic behind this is that declining U.S. yields will lower the fair value of the dollar, thereby supporting the yen.

According to Morgan Stanley’s medium-term outlook, the USD/JPY exchange rate is expected to reach 140 in the first quarter of 2026, then rebound to around 147 by the end of the year. Team members, including Matthew Hornbach, point out that the current exchange rate indeed deviates from fair value, and once it reverts to a reasonable level, the yen’s upward momentum will become more evident.

The institution also emphasizes that Japan’s fiscal policy is not as aggressive as the outside world perceives, which means there is still room for the yen to rise. However, they also foresee that as the U.S. economy gradually recovers in the second half of next year, the return of arbitrage trading demand could exert short-term pressure on the yen.

Market consensus points to the yen becoming the strongest currency next year

Morgan Stanley’s view is not an isolated voice. A November survey of about 170 fund managers by Bank of America showed that approximately one-third of respondents believe the yen will outperform other major currencies next year, becoming the best-performing investment.

These professional investors’ judgments are based on two core factors: first, the yen has been undervalued for a long time and has significant correction potential; second, possible intervention measures by the Japanese government and the central bank could provide additional support for the yen. These factors combined support market expectations of a reversal in the yen’s trend.

From the perspective of exchange rate trend analysis, whether it is top Wall Street investment banks or fund managers, attitudes toward the yen’s future have shown a clear shift. 2026 may indeed be the year of the yen’s rebound.