The Fed's rate cut expectations heat up, and the USD/JPY may face a deep adjustment next year

Currently, there is a clear divergence in the monetary policy orientations of the US and Japanese central banks. Coupled with the Japanese government’s possible market intervention measures, this creates conditions for a rebound in the yen. As of November 25, the USD/JPY exchange rate hovered around 156.60, showing signs of a correction from earlier highs.

Market focus is centered on the Federal Reserve’s policy stance. The latest data indicates that traders’ expectations for a rate cut in December have risen to 80%, a shift driven by increasingly clear signals of slowing US economic growth. Once the Fed initiates a rate cut cycle, it will inevitably weaken the dollar’s attractiveness.

Morgan Stanley Charts the 2026 Exchange Rate Roadmap

The latest outlook from major investment bank Morgan Stanley sketches a key timeline for the yen’s prospects. The firm’s strategists predict that if the Fed continues to cut rates amid economic weakness, the USD/JPY exchange rate could appreciate by nearly 10% over the next few months. More specifically, by the first quarter of 2026, the USD/JPY may converge toward the 140 level, with a potential rebound to around 147 by the end of the year.

Morgan Stanley’s analytical framework emphasizes that the current USD/JPY deviates from its fair value. Strategist Matthew Hornbach and others point out that as US yields decline, the exchange rate’s return to fair value will pressure the dollar against the yen in the first half of next year. They also note that Japan’s fiscal policy expansion is actually limited, making it difficult to establish a lasting support for the yen. However, they expect that after the US economy recovers in the second half of the year, renewed enthusiasm for arbitrage trading will bring a new round of depreciation pressure on the yen.

Bank of America Survey Confirms Yen Rebound Expectations

Morgan Stanley’s forward-looking judgment resonates with the findings of a field survey conducted by Bank of America. In November, the bank surveyed about 170 fund managers and found that nearly one-third of respondents believe the yen will outperform other major currencies next year. This consensus among professional investors reflects a core logic: the yen is currently undervalued, and signals of possible official policy intervention by Japan suggest significant rebound potential. The optimistic attitude of fund managers supports the market’s long-term expectation of dollar weakness against the yen.