Is the Japanese Yen appreciation window opening? Morgan Stanley is optimistic about USD/JPY falling below 140 by 2026

The Federal Reserve’s shift towards an easing monetary policy is narrowing the US-Japan interest rate differential. As signs of slowing US economic growth emerge, market expectations for a rate cut by the Federal Reserve in December have risen to 80%, creating favorable conditions for the yen to appreciate.

Exchange Rate Turning Point Has Emerged, Yen Poised for Breakout

As of November 25, the USD/JPY stands at approximately 156.60, having retreated from recent highs. Morgan Stanley’s strategists believe that if the Fed continues to cut rates amid economic slowdown, the yen’s appreciation against the dollar could be about 10%. In other words, USD/JPY is likely to face downward pressure in the coming months.

Morgan Stanley strategist Matthew Hornbach and others point out that the current USD/JPY exchange rate is deviating from its fair value. As US yields decline, the theoretical fair value will also decrease, indicating that yen appreciation is driven by fundamentals rather than market expectations.

Key Milestone in 2026, Exchange Rate Expected to Dip and Rebound

According to Morgan Stanley’s forecast model, USD/JPY is expected to dip to around 140 in the first quarter of 2026, then rebound to approximately 147 by the end of the year. This projection is based on the US economic recovery cycle and arbitrage trading trends.

It is noteworthy that Morgan Stanley believes Japan’s fiscal policy stance is not as expansionary as the market perceives. Coupled with potential Japanese government intervention threats, the yen’s future trajectory remains uncertain. As the US economy is expected to recover in the second half of next year, demand for arbitrage trading may increase, exerting new downward pressure on the yen.

Fund Managers Favor Yen Appreciation, Consensus Grows

A recent survey by US banks confirms this outlook. Among about 170 fund managers surveyed, roughly one-third believe the yen will outperform other major currencies next year and become the best-performing reserve currency.

Their views are mainly based on two points: first, the yen is relatively undervalued; second, Japanese government and central bank interventions could support yen appreciation. Compared to the downward pressure on US interest rates, the yen has upward momentum both in policy and valuation aspects.

Morgan Stanley and US banks share similar views, reflecting a broad market consensus on the yen’s appreciation prospects.