Will the USD/JPY reach 140 in 2026? Institutions bet on a wave of yen appreciation

The outlook for the yen’s rebound is becoming increasingly clear. Morgan Stanley’s latest forecast indicates that the USD/JPY exchange rate could fall to around 140 as early as the first quarter of 2026, implying a nearly 10% appreciation of the yen against the dollar.

Two Major Forces Driving the Yen Reversal

Currently, USD/JPY is fluctuating around 156.60, but signals of change have already emerged. On one hand, expectations of Fed rate cuts are intensifying—recent dovish comments from officials have pushed market expectations for a rate cut in December to 80%. On the other hand, Japan’s new Prime Minister, Sanae Takaichi, is promoting proactive fiscal policies, providing policy support for the yen.

As the US economy slows and the Fed continues to cut rates, US yields are inevitably declining, which will directly suppress the fair value of USD/JPY. Morgan Stanley strategist Matthew Hornbach and others point out that the current exchange rate deviates from fair value, and yen appreciation during the reversion process is highly probable.

Why the Yen Can Rebound

The logical chain of strategists is very clear: Japan’s fiscal policy, while active, is not excessively expansionary, leaving room for central bank intervention. Meanwhile, fund managers generally believe that the yen is severely undervalued, and the market is psychologically prepared for possible intervention by the government and the central bank.

A November survey by Bank of America further confirms this view. Among about 170 fund managers interviewed, roughly one-third believe the yen will be the best-performing major currency next year. In their view, the undervalued yen combined with potential policy support is enough to trigger a rebound.

Future Focus

The story of USD/JPY is not over. Morgan Stanley predicts that after reaching 140 in the first quarter of 2026, the exchange rate could rebound to around 147 before the end of the year. What does this mean? As signs of economic recovery emerge in the US in the second half of the year, demand for currency arbitrage trades may increase, putting new downward pressure on the yen.

In simple terms, the yen’s appreciation window may be concentrated in the first half of next year. Missing this opportunity, the yen could face renewed pressure.