The US Dollar to Yen (USD/JPY) exchange rate remains close to multi-decade highs and is trading around 160.20 after repeatedly testing the 160 level over recent weeks.

Citi expects USD/JPY to remain elevated in the short term but continues to forecast a move lower towards 155 by the end of the year. The bank believes the 160 area should act as an effective ceiling for the currency pair.

According to Citi, the recent resilience of USD/JPY is surprising given that long-term interest-rate differentials between the US and Japan have narrowed significantly, a development that would normally support Yen appreciation.

The bank argues that strong hedging-related Yen selling linked to record-high Japanese equity holdings has become a key factor supporting USD/JPY and offsetting the impact of narrower yield spreads.

Citi’s proprietary valuation models suggest that current USD/JPY levels remain broadly justified by market fundamentals and international capital flows. The bank’s analysis indicates there is no major mispricing in the pair at present.

The bank identifies Japanese equities and the broader US Dollar trend as the two most important drivers of USD/JPY, with interest-rate spreads still playing a significant role in determining direction.

While Citi remains constructive on the Yen over the medium term, it believes that any meaningful short-term decline in USD/JPY would likely require further Bank of Japan policy normalisation and additional currency support measures from Japanese authorities.

For now, Citi expects USD/JPY to remain close to current levels, but continues to forecast a gradual correction lower towards 155 as monetary policy normalisation and a moderation in Yen-selling flows begin to support the Japanese currency.