Strategists at major financial institutions, including Wells Fargo and Citigroup, are positioning for a weaker yen, anticipating that the Bank of Japan's meeting on Friday will fall short of the market's aggressive rate-hike expectations. The consensus among these analysts is that the central bank's stance will be less hawkish than priced in, leaving yen bears in control.
Among the most bearish calls, Citigroup projects the yen could weaken to 159 against the US dollar in the coming weeks. The currency was trading nearly flat at 156.02 at the time of writing. Swap markets have almost fully priced in a 25-basis-point rate hike at Friday's conclusion, shifting the focus to BOJ Governor Kazuo Ueda's post-meeting press conference for clues on the future policy path, with further increases expected before year-end.
Where to begin with the bearish sentiment? Wells Fargo strategist Chidu Narayanan highlighted the high bar for the BOJ to clear, noting in a Thursday report that "the hurdle for the BOJ to meet these market expectations is quite high, and even higher for it to exceed them." He added that "the risk is skewed towards a more dovish outcome than what is priced in."
The Japanese currency's current weakness follows a sharp rally earlier this month, when it surged to its strongest level since mid-February, breaking past the peak set after the rare joint intervention by the US and Japan in late July. That momentum has now reversed, pressured by the Federal Reserve's first rate cut in three years on Wednesday, with Chair Christopher Waller signaling further tightening in the fight against inflation.
The persistent depreciation of the yen over recent years is largely attributed to the significant interest rate differentials between Japan and other major economies. Citigroup strategist Daniel Tobon, in a Thursday report, acknowledged the near-term downside risk for the yen if the BOJ disappoints, but he views the recent policy shifts as part of a broader "paradigm shift" that could ultimately strengthen the currency over the long term. "Our truly major concerns about the yen are slowly moving in the right direction," Tobon stated.
Chris Turner, head of G10 FX strategy at ING, predicts the yen will depreciate to 157 or 158 if the BOJ fails to signal more aggressive rate hikes. Meanwhile, Georgette Boele, senior FX strategist at ABN AMRO, forecasts yen strength will emerge in the second half of 2027, coinciding with anticipated rate cuts from both the Fed and the European Central Bank. For now, however, she expects the yen to hover around 154 against the dollar until the first quarter of 2027, noting, "We expect higher energy prices to temporarily interrupt the yen's recovery."