Will the Japanese Yen turn around in 2026? Multiple top institutions are collectively bullish

The yen exchange rate situation may see a turning point. As expectations for Fed rate cuts intensify and Japan’s new government actively advances fiscal policies, market opinions on the yen’s future performance are diverging—some institutions believe the yen is severely undervalued and could see significant gains.

**Morgan Stanley: Yen may appreciate nearly 10% within the year**

According to the latest analysis by Morgan Stanley strategists, if the Federal Reserve continues to cut rates amid slowing U.S. economic growth, there is considerable room for the yen to appreciate against the dollar. Strategist Matthew Hornbach and others stated that the yen’s exchange rate significantly deviates from its fair value range. If it reverts to the fair value level, the yen could appreciate by nearly 10% in the coming months.

As of November 25, the USD/JPY quote was around 156.60, having pulled back from previous highs. Recent statements from Fed officials lean dovish, and market expectations for a rate cut in December have risen to 80%, further supporting the outlook for yen appreciation.

**Key milestone in 2026: Exchange rate testing 140 level**

Morgan Stanley forecasts that the USD/JPY exchange rate will fall to around 140 in the first quarter of 2026, then possibly rebound to 147 by the end of the year. The institution believes that the downward trend in U.S. long-term bond yields will be the main factor lowering the fair value of USD/JPY, providing a medium-term basis for yen appreciation.

However, strategists also highlight risks in the second half of 2026. As the U.S. economy potentially recovers in the latter half of 2026, demand for arbitrage trading may rise again, which could exert new downward pressure on the yen. Although Japan’s fiscal policies have been adjusted, they do not show particularly aggressive expansionary measures overall.

**Fund manager consensus: Yen will be the biggest winner**

Morgan Stanley’s outlook aligns with findings from a Bank of America survey. In November, BofA surveyed about 170 fund managers, and roughly one-third of respondents expect the yen to outperform other major currencies in 2026, making it the best-performing currency asset.

The main reasons fund managers favor the yen include: the current yen exchange rate is undervalued, and potential intervention measures by the Japanese government and central bank provide policy support. This policy protection further boosts market confidence in yen appreciation.