Multiple institutions are optimistic about the yen's rebound in 2026. Will the USD/JPY exchange rate fall below 140?

Currently, the US and Japan monetary policies are in a divergence window, and market opinions on the future trend of the yen have shown interesting divergence—some institutions believe the yen is significantly undervalued, and a rebound space has already opened.

The Fed’s Rate Cut Becomes a Key Variable

As of November 25, the USD/JPY quote is around 156.60. Recent dovish statements from Federal Reserve officials have boosted market expectations of an interest rate cut in December to 80%, and this change is reshaping exchange rate expectations. Morgan Stanley’s analysis team pointed out that if the Fed continues to cut rates amid clear signs of economic slowdown, the yen against the dollar could appreciate by nearly 10%—this potential appreciation may gradually unfold over the coming months.

Two Major Investment Banks Concur

Morgan Stanley expects the USD/JPY exchange rate to fall back to around 140 by the first quarter of 2026, then rebound to about 147 by the end of the year. The bank believes that the current exchange rate is significantly above its historical fair value, and once US yields decline, the fair value will further decrease, which will support the yen’s appreciation expectations.

Meanwhile, Bank of America reached a similar conclusion in a November survey of about 170 fund managers. About one-third of the respondents believe the yen will be the best-performing major currency in 2026. Their judgment is based on the fact that the yen is currently undervalued, and policy interventions by the Japanese government and central bank may further support yen appreciation.

Supply-side Pressure and Demand-side Opportunities

However, Morgan Stanley also pointed out risk factors for the second half of the year— as the US economy enters a recovery track in the second half of next year, the demand for carry trades may rise again, putting new downward pressure on the yen. From a fiscal policy perspective, Japan’s new Prime Minister, Sanae Takaichi, generally does not adopt a highly expansionary stance, meaning limited stimulus factors.

From a longer-term perspective, the consensus among institutions is clear: the yen’s valuation attractiveness is recovering, and the threat of policy intervention also provides the market with new reference points. The yen’s rebound may not be a sudden event but a gradual process.