Is the 2026 Yen rebound imminent? Several investment banks are optimistic about the Yen appreciating by up to 10%

Central bank monetary policy divergence is intensifying, reshaping the global exchange rate landscape. As the Federal Reserve signals a dovish stance, market expectations for a rate cut in December have soared to 80%. Meanwhile, the new Japanese government is increasingly clear in its implementation of proactive fiscal policies, and this policy contrast is bringing new upward momentum to the yen.

US Dollar Weakens, Yen Gains Momentum

As of mid-November, the USD/JPY traded around 156.60, showing a significant pullback from recent highs. Morgan Stanley’s research team pointed out that if the Fed continues to cut rates and signs of slowing US economic growth become more evident, the appreciation potential of the yen against the dollar could expand to nearly 10%.

The logic behind this is that declining US yields will directly lower the fair value of the dollar. Morgan Stanley strategist Matthew Hornbach and others believe that the current USD/JPY exchange rate is significantly deviated from fundamentals. If it reverts to fair value, the rate could fall to around 140 in the first quarter of 2026, followed by a slight rebound to about 147 by the end of the year.

Behind Currency Depreciation: Investment Opportunities in Yen Appreciation

From a currency depreciation perspective, a relative weakening of the dollar means an appreciation of yen assets. For investors holding yen or yen-denominated assets, this not only brings exchange rate gains but also enhances the relative advantage of asset allocations such as Japanese stocks and bonds.

At the same time, expectations of Japanese government intervention are supporting the yen. Although Japan’s fiscal policy stance does not appear particularly expansionary, the government’s attention to the yen exchange rate has clearly increased, providing a policy floor for the yen. Morgan Stanley expects that as the US economy rebounds in the second half of next year, arbitrage trading demand may rise. In the short term, the yen will still face some downward pressure, but the medium-term appreciation trend is already set.

Fund Managers Are Optimistic: Yen Could Be the Year’s Winner

Recent survey data from Bank of America further confirms this outlook. The bank’s questionnaire of about 170 fund managers shows that over one-third believe the yen will outperform other major currencies in 2026, becoming the best-performing reserve currency. The managers’ reasoning is similar: the yen is significantly undervalued, and potential intervention by the Bank of Japan and the government supports this view. The probability of a yen reversal has clearly increased.

This consensus reflects a deep reassessment of future exchange rate patterns. The appreciation potential and investment value of the yen are gradually being recognized by institutional investors.