USD/JPY may experience a major reversal? Multiple institutions predict that the exchange rate will face the biggest adjustment in ten years by 2026

The currency market has recently been stirred up. As of November 25, USD/JPY hovers around 156.60, and behind these seemingly calm numbers, there are underlying currents—several top global investment banks are quietly rewriting their expectations for this currency pair.

Policy Divergence Triggers Exchange Rate Reversal

The policy directions of the Federal Reserve and the Bank of Japan are showing a clear divergence. As signs of US economic growth gradually weaken, the market’s probability of the Fed continuing to cut interest rates in December has risen to 80%. Meanwhile, the new Japanese Prime Minister, Sanae Takashi, is actively promoting expansionary fiscal measures, and this policy mix is brewing a potential reversal in the exchange rate.

Strategists at Morgan Stanley point out that, amid the Fed’s continued easing of monetary policy, USD/JPY could face nearly 10% depreciation pressure in the coming months. More aggressive forecasts from their outlook for 2026 suggest that USD/JPY could fall to 140 in the first quarter of 2026, which would imply about a 10% appreciation of the yen relative to the dollar.

Fair Value Reversion Becomes Key

What is driving this change? Morgan Stanley analysts, including Matthew Hornbach, answer: deviation of the exchange rate from fair value.

They believe that the current high level of USD/JPY is mainly due to the interest rate differential between the US and Japan. As US Treasury yields decline, this gap will inevitably narrow, thereby lowering the theoretical fair value of the exchange rate. In other words, the current high level is essentially unsustainable.

According to Morgan Stanley’s models, USD/JPY is expected to rebound to around 147 by the end of 2026, but this remains well below current levels, reflecting a deep-seated adjustment trend.

Market Consensus Is Forming

Morgan Stanley’s judgment is not isolated. A recent survey of about 170 fund managers by Bank of America shows that roughly one-third of professionals are optimistic about the yen’s performance in 2026, expecting it to deliver the best returns among major currencies.

The reasoning of these seasoned investors is highly consistent: the yen is currently undervalued historically, there is potential government and central bank intervention support, and a favorable policy cycle shift.

Pressure in the Second Half of the Year Is Unavoidable

It is important to note that Morgan Stanley also points out that, as signs of US economic recovery may emerge in the second half of 2026, market demand for dollar arbitrage trades could rise again, putting renewed downward pressure on the yen. Therefore, this exchange rate reversal is not a one-step process but a phased and volatile one.

Recently, the Japanese government has also frequently expressed concerns about excessive yen depreciation, with intervention threats often surfacing in the market. This policy support constrains the yen’s downside and provides conditions for a reversal.

Overall, USD/JPY is at a critical turning point. From technical, fundamental, to policy perspectives, multiple factors are pointing in the same direction—the yen’s appreciation cycle may be quietly beginning.