FX Viewpoint: Wake up, yen… a window may be opening

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FX Viewpoint: Wake up, yen… a window may be opening

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FX Viewpoint

Wake up, yen… a window may be opening

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Medium-term JPY view revised toward neutral 19 May 2026

We have been structurally bearish on JPY since 2021, and since 2022 have premised our G10 FX Strategy

outlook on a prolonged period of JPY weakness driven by structural outflows. However, Global

there are now signs of an improvement in structural flow dynamics. Moreover, other Shusuke Yamada, CFA

major currencies face their own risk factors. As a result, the medium-term outlook for FX/Rates Strategist

JPY has improved. We revise down our USD/JPY forecast for end-2026 to 152 from 157 BofAS+81 3 6225Japan8515

(consensus: 153; forwards: 156). That said, a clear JPY long would still require a policy shusuke.yamada@bofa.com

shift—or FX and rate levels that would trigger such a shift—as well as a decline in oil

prices.

A shift in one of the two drivers of JPY weakness

There have been two key drivers behind JPY depreciation in recent years. First,

persistent structural JPY selling has kept FX supply-demand balance skewed toward

excess JPY supply. Second, the market’s assessment of the policy mix—overly

accommodative monetary policy and fiscal risks (particularly under the Takaichi

administration)—has weighed on the currency. However, structural JPY selling is now

moderating. On a basic balance basis (current account plus direct investment), Japan has

moved into surplus, while the euro area surplus has narrowed and the US continues to

run a sizable deficit. Japanese equities’ outperformance versus US and European peers

also points to an improvement in JPY fundamentals.

When higher yields become supportive

Since 2024, JPY has weakened despite a widening disconnect from rate differentials.