Morgan Stanley bullish on the yen: exchange rate expected to fall to 140 by 2026, or appreciate by 10%

The recent yen exchange rate trend has attracted significant attention, with multiple leading institutions showing diverging outlooks. As of November 25, the USD/JPY exchange rate stood at 156.60, slightly below its high point, but the long-term trend remains uncertain.

A recent research report from Morgan Stanley’s strategy team indicates that if the Federal Reserve implements consecutive rate cuts amid an economic slowdown, the yen against the dollar could appreciate by nearly 10% in the coming months. The firm forecasts that the USD/JPY rate will fall to around 140 by the first quarter of 2026, then rebound to 147 by the end of the year.

Fair Value Reversion Drives Exchange Rate Adjustment

Morgan Stanley strategists, including Matthew Hornbach, emphasize that the current USD/JPY rate has deviated from its fair value. They believe that as US yields face downward pressure, once the exchange rate reverts to a reasonable range, a significant decline is expected in early 2026.

Notably, although Japan’s new Prime Minister, Sanae Takaichi, has implemented more proactive fiscal policies, Morgan Stanley assesses that these measures are not particularly expansionary. The firm also anticipates that when the US economy resumes growth in the second half of next year, the resurgence of arbitrage trading will exert new downward pressure on the yen.

Market Consensus: Yen Could Become a Dark Horse

Recent dovish signals from Federal Reserve officials have increased market expectations for a rate cut in December to 80%, further supporting the bullish outlook on the yen. A recent survey by Bank of America also confirms this trend: among approximately 170 fund managers interviewed, about one-third believe the yen will outperform other major currencies next year, making it the highest-return currency choice.

Fund managers’ logic is clear: the yen is currently undervalued, and potential interventions by the Japanese government and central bank could provide upward support. This suggests that, under multiple factors, the yen may be poised for a long-anticipated reversal.