Singapore-based OCBC’s research unit believes the Japanese yen, currently one of the world’s most undervalued currencies, is nearing a potential turning point. While past interventions have had limited sustained impact, emerging domestic policy changes from the Bank of Japan, including a faster pace of policy normalization, are expected to provide crucial support for the yen. OCBC forecasts the yen to strengthen against the U.S. dollar in the coming years.
READ MORE FROM MARKETS INSIDER
The Japanese yen, long considered one of the world's most undervalued currencies, may be approaching a significant turning point. According to a report by OCBC's research unit, while its cheap valuation hasn't prevented depreciation pressures, emerging domestic policy shifts could offer support.
Strategists at OCBC noted that unlike the Chinese Yuan, the yen's low valuation has not translated into a stronger position. Recent coordinated interventions by Japanese and U.S. authorities following the yen's surge to multi-decade highs in July aimed to curb speculative short positions and signal policymakers' concerns. However, OCBC suggests that these interventions alone are insufficient for a sustained recovery.
The key to a turnaround, according to OCBC, lies in domestic policy changes. The Bank of Japan (BoJ) appears increasingly inclined to normalize its policy at a faster pace, thereby reducing the policy gap with other major central banks. This shift in direction is seen as supportive for the yen, although the BoJ is unlikely to adopt a more aggressive stance than the U.S. Federal Reserve in the immediate future.
OCBC has revised its yen forecast, now expecting the currency to trade at 155 against the U.S. dollar by the end of 2026, an upward revision from the previous forecast of 160. By the end of 2027, they anticipate the yen to be at 150.
"We expect the JPY's deep undervaluation to become a more meaningful driver of FX performance as policy and flow dynamics turn increasingly supportive," OCBC stated. The potential for a shift in Japanese portfolio flows, with a meaningful return towards domestic assets, could provide a "powerful tailwind" for the yen. OCBC anticipates further policy initiatives designed to stimulate domestic investment by Japanese investors.
Furthermore, OCBC expects the Swiss franc (CHF) to continue serving as the preferred funding currency for carry trades as the yen strengthens. This expectation is bolstered by the anticipated decision of the Swiss National Bank to maintain policy rates at 0% through at least the end of the year, preserving the CHF's role as a low-yielding funding currency.
