## US Dollar / Japanese Yen Prelude to Adjustment? Institutions Optimistic About Yen's Rebound Next Year

A new voice is emerging in the financial markets. Over the past month, the yen has been under continuous pressure, but several investment banks are changing their tone—this time, a rebound is truly on the horizon.

As of mid-November, USD/JPY hovered around 156.60. Behind this seemingly calm figure lies a clear divergence in policy orientations between two major economies. On one side, Japan's new Prime Minister is implementing active fiscal stimulus; on the other, the Federal Reserve faces economic slowdown pressures, with market expectations for a rate cut in December soaring to 80%.

**Morgan Stanley's New Outlook**

Morgan Stanley's strategists recently issued a notable forecast: if the Federal Reserve continues to cut rates amid economic weakness, the yen against the dollar could strengthen by nearly 10% in the coming months. More aggressively, they predict that USD/JPY will dip to around 140 in the first quarter of 2026, then rebound to 147 by the end of the year.

What is the logic behind this? Morgan Stanley analysts, including Matthew Hornbach, point out that the current USD/JPY deviates from fair value. The downward pressure on US yields will ultimately lower the equilibrium exchange rate, which is a natural correction toward reasonable valuation. They also emphasize that Japan's fiscal expansion is not particularly aggressive; the real variable is on the US side—if the economy restarts growth in the second half of next year, arbitrage trading will resurface, and the yen will face new downward pressure.

**Bank of America Also Bullish on Yen**

Interestingly, Bank of America's latest survey results align closely with Morgan Stanley's view. Their November questionnaire of about 170 fund managers shows that one-third of professionals believe the yen will be the strongest-performing major currency next year.

The fund managers' reasoning is straightforward: the yen is currently significantly undervalued, and with potential intervention policies by the Japanese government and central bank, there is considerable room for a rebound. This indicates that institutional investors have already sensed a new opportunity.

A shift in exchange rate expectations often precedes actual market movements. This time, the market may be re-evaluating the yen's fundamental value.