Bank of America cut its year end forecast for USD JPY to 152 from 157, in a move that reflects a gradual shift in its medium term view on the Japanese yen from structural bearishness toward a more neutral stance, after years of betting on yen weakness.
Shusuke Yamada, FX strategist at the bank, said the bearish view on the yen began in 2021, while the bank’s outlook since 2022 had been based on a prolonged period of yen weakness driven by structural outflows from Japan. However, he noted that the picture is now starting to change, with clear signs of improvement in structural flow dynamics.
Bank of America believes that one of the main factors that pressured the yen over recent years, structural selling of the currency, is gradually losing momentum, at a time when other major currencies are facing their own challenges. Based on that, the bank also cut its end 2027 USD JPY forecast to 145 from 150, placing the new estimate slightly below market consensus and forward rates.
The main shift in the bank’s view is linked to the improvement in Japan’s external balance. On a basic balance basis, which combines the current account with direct investment flows, Japan has moved into surplus, while the euro area surplus has almost disappeared, and the United States continues to run a deficit of around 4% of GDP.
AI related exports have also played an important role in supporting this improvement, rising to around 22% of Japan’s total exports, helping to offset part of the widening deficit in digital services.
In the same context, Yamada pointed out that rising inward foreign direct investment into Japan has become an additional supportive factor, after growing enough to broadly offset the continued expansion of Japanese direct investment abroad. Japan’s improved ranking in the Kearney FDI Confidence Index to third globally in 2025, behind only the United States and Canada, also strengthened the more balanced view toward the Japanese economy.
On the yield side, Bank of America believes that any further rise in Japanese bond yields could turn into a positive factor for the yen, provided fiscal risks peak and do not become a new source of pressure. Yamada based this view on the narrowing gap between bank loans and deposits, alongside the shift of real yields on 10 year Japanese government bonds into positive territory. These signs suggest that higher yields are increasingly linked to stronger economic activity, not only fiscal concerns.
Despite this more constructive reading, the bank remains cautious about building outright long yen positions at this stage. According to Yamada, a clear bet on yen strength still needs stronger catalysts, whether through a shift in monetary policy, or interest rate and exchange rate levels reaching areas that would push policymakers to act, along with a decline in oil prices.
Among the key catalysts the bank is watching in the coming period are 10 year Japanese government bond yields reaching 3%, USD JPY rising to 160, or Brent crude falling below $90 per barrel. On the other hand, several risks could delay the yen’s recovery, most notably persistently high oil prices, a slowdown in Japan’s AI related exports, faster household selling of the local currency, and wider fiscal pressures inside the Japanese economy.
On the US dollar side, the currency held near its highest levels in six weeks during today’s trading, as markets remained cautious about the Iran war and its potential impact on inflation and the path of interest rates in the coming period. The dollar’s resilience was supported by growing bets that persistent inflationary pressures, especially those driven by higher energy prices, could push the Federal Reserve to reconsider raising interest rates later this year.
Although oil prices eased slightly after US signals of progress in negotiations with Iran, crude losses remained limited due to the continued closure of the Strait of Hormuz, keeping supply concerns firmly present in the market. This leaves investors facing a complex equation. On one side, there is talk of diplomatic progress, while on the other, markets are still not convinced that the war is close to ending or that its inflationary impact is fading, especially after the conflict disrupted a large share of global oil supplies and pushed prices to elevated levels.
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