Is the Japanese Yen about to rebound? Multiple investment banks are optimistic about the reversal of the 2026 exchange rate trend

The Japanese Yen has been under continuous pressure over the past month, with USD/JPY remaining high, but this pattern may soon change. As Japan’s new Prime Minister, Sanae Takaichi, implements proactive fiscal policies, coupled with increasing pressure from the Federal Reserve to cut interest rates, market perceptions of the Yen are quietly shifting.

As of November 25, the USD/JPY quote stands at 156.60, having retreated from recent highs. Recently, Federal Reserve officials have made dovish statements, and the market is pricing in an 80% chance of a rate cut in December, which is altering the US-Japan interest rate differential landscape.

Morgan Stanley’s Contrarian Currency Forecast

Morgan Stanley analysts, including Matthew Hornbach, have made a noteworthy prediction: if the Federal Reserve continues to cut rates amid signs of economic slowdown, the Yen could appreciate by nearly 10% against the dollar in the coming months.

The bank expects USD/JPY to reach around 140 in the first quarter of 2026, then rebound to approximately 147 by the end of that year. Analysts point out that the current exchange rate is significantly above fair value, and declining US yields will further depress the theoretical value, implying a downward correction for the Yen.

They also emphasize that Japan’s fiscal stimulus is not particularly aggressive. After the US economic recovery in the second half of 2026, the resumption of carry trade demand is expected to put new pressure on the Yen—but that is a story for later.

Wall Street Investment Banks collectively bullish on the Yen outlook

Morgan Stanley’s view is not isolated. A November survey of about 170 fund managers by Bank of America shows that nearly one-third believe the Yen will perform best next year, surpassing major currencies like the Euro and Pound.

The consensus among these fund managers centers on three points: the Yen is severely undervalued, the Japanese government and central bank may intervene, and a rebound in the exchange rate is inevitable. Coupled with diverging central bank policies and evolving fiscal strategies, the Yen faces not just a one-way decline but a potential structural turning point.

The current high levels of USD/JPY may well be the buildup phase for the next Yen rally.