Japanese Yen Recovery Remains Elusive as MUFG Analysts Retain USD/JPY 149 Forecast

MUFG sees the Japanese Yen nearing a turning point against the US Dollar, but persistent overseas investment is limiting the benefit of lower US yields.

The US Dollar to Yen exchange rate was trading around 158.19 on Wednesday, below its opening level but well above an earlier low of 157.43, as another recovery in the Japanese currency struggled to hold.

MUFG still expects the Yen to strengthen, retaining a USD/JPY forecast of 149 for September 2027 in its latest monthly projections.

Derek Halpenny, MUFG’s head of research for global markets EMEA and international securities, identifies a striking divergence:

“The 2-year UST bond yield is now down 35bps from the intra-day high set on 29th September. Over the same period, USD/JPY is one big figure higher.”

That means the Dollar has gained roughly one Yen over that period, even as the return on short-dated US government debt has fallen.

Halpenny adds:

“Intervention in last July / early August has distorted the link with rates but what the movement of the yen does indicate is that there are still some structural flows that continue to weigh on yen performance and those flows could well be slow to change.”

Japanese savings keep finding a home abroad

The continuing attraction of overseas equities helps explain why a narrower interest-rate gap has not been enough.

Japan’s expanded NISA tax-exempt investment scheme gives households greater scope to invest.

NISA does not require investors to buy foreign assets, but MUFG sees the expansion contributing to demand for overseas markets, particularly the US.

Its latest discussion draws on September figures showing almost ¥4 trillion of foreign-equity purchases over three months, evidence of the persistent overseas buying already testing earlier Yen recovery forecasts.

Halpenny expects that pressure to continue:

“This expanded NISA limit will likely mean this scale of outflow persists given the erosion of savings held in deposit savings due to higher inflation and given strong equity market returns, in particular in the US. 47% of household wealth in Japan is in cash deposits.”

Companies have a separate reason to invest abroad: Japan’s shrinking population limits opportunities in their home market.

Halpenny writes:

“FDI outflows as businesses look to expand in growing markets abroad continues to act as a bigger drag on the yen. The 12mth sum of net FDI outflows has been running between JPY 24trn and JPY 28trn per year (USD 155bn to USD 180bn) for the last three years.”

These decisions concern where businesses expand, rather than simply which country offers the highest short-term interest rate, making them less responsive to a modest change in bond yields.

MUFG still expects domestic policy to help

The bank nevertheless sees grounds for a gradual recovery as Japan’s monetary policy becomes more restrictive and domestic assets become more attractive.

The Bank of Japan held its policy rate at 1.25% on 30 October, with one of its nine policymakers preferring an increase to 1.50%.

MUFG expects a December increase followed by two more in 2027, taking the policy rate to 2.00%.

But its currency outlook makes clear that the anticipated reallocation of Japanese savings has yet to appear:

“Capital flows do not yet indicate any notable shift in preference to domestic assets by Japanese investors but that could gradually become evident going forward.”

That lag also featured in ING’s case for an earlier BoJ hike without an immediate, lasting Yen recovery.

MUFG’s monthly outlook also identifies a sharper market sell-off as a potential catalyst:

“If there was a bigger risk-off period that saw front-end yields drop more notably it would likely coincide with yen outperformance.”

October’s market turbulence was insufficient, in Halpenny’s assessment, but a bigger retreat from risk could restore more of the Yen’s appeal as a haven.

“We still suspect the yen is close to a turning point and market rates and/or policies by the government to encourage greater sums of capital to remain in Japan should have a positive impact on the yen.”

What This Means for USD/JPY

Wednesday’s retreat in USD/JPY offers some support for the Yen, but the reversal from the session low shows how difficult it remains to sustain gains. Lower US yields alone have not displaced the demand for foreign assets described by MUFG.

The bank’s retained 149 projection requires a more lasting change over the coming year. Further BoJ tightening could improve the return available in Japan, although the evidence still needs to show investors choosing to keep more money at home.

A deeper equity-market correction could accelerate the Yen’s recovery if it changes investors’ willingness to hold overseas risk. Without that shift, continuing household purchases and corporate expansion abroad could keep absorbing the benefit of a narrower yield gap.