Bank of America’s Lower USD/JPY Forecast Signals a Gradual Yen Recovery

3. Forecasts Across Major Banks Show Wide Disagreement

Currency strategists are far from unified about where USD/JPY will end 2026.

Some forecasts anticipate stronger yen appreciation. For example, one outlook from Daiwa Asset Management projects the currency strengthening to around 146 per dollar by the end of 2026, driven by narrowing real interest‑rate differentials between Japan and the U.S.

But across major banks the estimates vary widely. Surveys and market commentary show year‑end projections spanning roughly 150 to 164, reflecting uncertainty over whether dollar strength or yen recovery will dominate.

This unusually wide range highlights how sensitive USD/JPY remains to shifts in global interest‑rate expectations.

4. Intervention Risk Creates a Ceiling Near 160

Japanese authorities have repeatedly signaled discomfort with extreme yen weakness.

Officials have intensified warnings as USD/JPY approaches the 160 level, which markets increasingly treat as a potential intervention zone. Former BOJ officials and policymakers have indicated that authorities could step into the market if depreciation accelerates beyond that threshold.

Recent episodes reinforce that risk. When the exchange rate pushed above 160, verbal intervention from Japanese officials triggered a rapid pullback, showing how sensitive markets are to policy signals.

This intervention risk effectively acts as a soft cap on the pair’s upside, even if macro fundamentals still favor the dollar.

5. Inflation Supports Gradual BOJ Normalization

Japan’s inflation environment also supports the case for further monetary tightening.

The Bank of Japan projects core CPI inflation of roughly 2.5%–3.0% in fiscal 2026, above its long‑standing 2% price‑stability target.

If inflation remains around these levels, policymakers may continue raising rates gradually—an important shift after decades of near‑zero interest rates. That process would likely provide incremental support to the yen.

6. Japan’s Strong External Balance Helps the Currency

Japan’s balance‑of‑payments position is another supportive factor.

The country recorded a current‑account surplus of about ¥4.68 trillion in March 2026, up sharply from the previous year.

A persistent surplus means Japan earns more from exports, investment income, and trade with the rest of the world than it spends abroad. Over time, those inflows can help stabilize or strengthen the currency.

The Bottom Line for USD/JPY

Bank of America’s lower USD/JPY forecast reflects a shifting macro backdrop rather than a dramatic change in direction.

Several forces now point toward gradual yen stabilization:

• BOJ rate hikes and policy normalization
• Potential Federal Reserve rate cuts
• narrowing U.S.–Japan yield differentials
• strong current‑account surpluses

However, countervailing factors—such as still‑low Japanese interest rates and ongoing capital outflows—mean a sharp yen rally is not the base case.

The result is a middle‑ground scenario: USD/JPY drifting somewhat lower from extreme levels but likely remaining above 150 for much of 2026, unless monetary policy diverges more sharply than currently expected.