Will the 2026 Japanese Yen rebound become a certainty? Several major banks predict USD/JPY may fall to 140

Recent market sentiment towards the Japanese Yen has shifted. As the Federal Reserve enters a rate-cut cycle, the US-Japan interest rate differential is gradually narrowing. Coupled with Japan’s new government’s proactive fiscal stance and potential central bank interventions, institutional investors are beginning to favor the Yen’s performance over the next 12 to 18 months.

Fund Managers Reach Consensus: Yen Valuation Has Repair Potential

According to a November survey by Bank of America of approximately 170 fund managers, nearly one-third of respondents believe the Yen will be the best-performing major currency by 2026. This high proportion reflects widespread market expectations of a Yen rebound.

The core argument among fund managers is that the current Yen exchange rate is undervalued relative to its fair value. Considering possible policy interventions by the Japanese government and central bank, as well as downward pressure on interest rates from slowing US economic growth, the Yen has significant upside potential.

Morgan Stanley Provides Specific Target: USD/JPY May Reach 140 in Q1 2026

Morgan Stanley’s strategy team has provided a quantitative forecast for Yen appreciation. The bank states that if the Federal Reserve continues to cut rates in response to signs of US economic slowdown, the Yen could appreciate nearly 10% against the US dollar in the coming months.

More specifically, Morgan Stanley predicts that the USD/JPY exchange rate will reach around 140 in the first quarter of 2026, then rebound to approximately 147 by the end of the year. As of the end of November, the rate was 156.60, meaning that if the forecast proves correct, the Yen could gain nearly 10%.

Strategist Matthew Hornbach and others point out that the current USD/JPY pricing has deviated from its long-term fair value. Once US yields decline due to economic slowdown, the exchange rate may face downward adjustment pressures.

Policy Divergence Drives Appreciation Logic

The divergence in monetary policies between Japan and the US is a key factor supporting Yen appreciation expectations. Recent dovish comments from Federal Reserve officials have increased market expectations of a rate cut in December to over 80%, indicating a higher likelihood of dollar downside.

Meanwhile, Japan’s new Prime Minister-led fiscal expansion policies, combined with potential central bank measures to manage the exchange rate, create an environment conducive to Yen appreciation. Morgan Stanley believes that Japan’s fiscal policy itself is not particularly aggressive, leaving room for a shift in the central bank’s stance.

It is worth noting that as the US economy potentially recovers in the second half of 2026, capital flows from arbitrage trading may shift again, putting new pressure on the Yen. However, until then, the appreciation trend should remain the main theme.

Market Consensus Is Taking Shape

Morgan Stanley and Bank of America share similar forecasts, reflecting a consensus among mainstream Wall Street institutions on the Yen’s outlook. Whether from valuation repair, policy divergence, or risk hedging perspectives, the Yen appears attractive, which also explains why fund managers are optimistic about its annual performance.