Morgan Stanley: If the Fed cuts interest rates, the yen may appreciate by nearly 10% in the coming months.

Morgan Stanley analysts pointed out that if the Fed continues to cut interest rates, the yen could appreciate by nearly 10% against the dollar in the coming months. The USD/JPY is currently deviating from its fair value, and it is expected to drop to 140 by the first quarter of 2026, but will rebound to around 147 by the end of the year.

Morgan Stanley's strategists have indicated that if the Fed continues to cut interest rates amid increasing signs of an economic slowdown in the U.S., the Japanese yen is expected to appreciate by nearly 10% against the dollar in the coming months. Strategists, including Matthew Hornbach, wrote that the dollar/yen is currently detached from its fair value, and if this relationship reverts, the USD/JPY exchange rate is likely to decline in the first quarter of 2026, as falling U.S. Treasury yields may depress fair value.

They pointed out that, "At the same time, Japan's fiscal policy is not particularly expansionary," and expect that as the U.S. economy recovers in the second half of next year and demand for carry trades rebounds, the yen will face downward pressure again. Morgan Stanley expects the USD/JPY to drop to around 140 in the first quarter of 2026, before rising again to around 147 by the end of the year.