Multiple institutions are optimistic about the yen's trend forecast: by 2026, USD/JPY may fall to 140

Morgan Stanley and a recent research report from Bank of America point to the same conclusion— the Japanese Yen is severely undervalued and may rebound next year.

Morgan Stanley’s Specific Forecasts

According to analysis by Morgan Stanley’s strategists, the USD/JPY exchange rate is expected to undergo significant adjustments. As of November 25, the USD/JPY was at 156.60, a correction from earlier highs. However, analysts believe this is not enough.

Morgan Stanley forecasts that USD/JPY will fall to around 140 in the first quarter of 2026, then rebound to 147 by the end of the year. This suggests the Yen could appreciate nearly 10% in the coming months. Strategist Matthew Hornbach and others noted, “Currently, USD/JPY is away from fair value. If it reverts to normal levels, considering the potential decline in U.S. yields, the exchange rate in Q1 2026 will likely trend lower.”

Federal Reserve Rate Cuts as a Trigger

A key factor driving a positive outlook for the Yen is the policy shift by the Federal Reserve. Recent dovish comments from Fed officials have increased market expectations of a rate cut in December to 80%. If signs of U.S. economic slowdown become more evident, the Fed may cut rates consecutively, which would directly reduce the attractiveness of the dollar relative to the Yen.

Conversely, Japan’s new Prime Minister, Sanae Takaichi, is implementing proactive fiscal policies, but Morgan Stanley’s team believes these measures are not as aggressive as the market anticipated, and thus insufficient to significantly push down the Yen.

BofA Survey: Fund Managers Favor the Yen

A November survey by Bank of America more directly reflects market sentiment. Among approximately 170 fund managers surveyed, about one-third explicitly stated that the Yen will be the best-performing major currency next year, delivering the strongest returns.

This consensus among professional investors is based on two main judgments: first, that the Yen is undervalued; second, that potential intervention by the Japanese government and central bank will support Yen appreciation.

Market Outlook

While the overall outlook for the Yen is optimistic, Morgan Stanley also warns that as the U.S. economy potentially recovers in the second half of next year, arbitrage trading demand will resurface, possibly leading to a new round of downward pressure on the Yen. This indicates that the window for Yen appreciation is not unlimited, and investors need to seize the opportunity.