The Japanese yen is unlikely to stage a meaningful recovery until next year, when the Bank of Japan begins slowing its balance-sheet reduction program, according to analysts at RBC Capital Markets.
The dollar was trading around 161.82 yen on Thursday, remaining near its strongest level since 1986 after touching 161.92 earlier this week.
Slower Quantitative Tightening Could Support the Yen
RBC strategist Abbas Keshvani said the Bank of Japan's plan to slow quantitative tightening (QT) beginning in April 2027 could help stabilize Japanese government bonds and improve investor confidence.
According to RBC, concerns about rising bond yields and potential capital losses have discouraged domestic investors from increasing exposure to Japanese assets.
"Japanese bonds offer higher yields than their foreign-exchange-hedged alternatives," Keshvani said. If bond markets stabilize as the pace of QT slows, local investors could gradually shift capital back into yen-denominated assets.
Bond Market Stability Seen as Key
The Bank of Japan has been reducing its massive bond holdings as it exits years of ultra-loose monetary policy. However, the reduction in central bank purchases has contributed to increased volatility in Japanese government bonds.
RBC believes a slower pace of QT could:
- Reduce volatility in government bonds.
- Lower concerns about capital losses.
- Encourage domestic institutions to repatriate overseas investments.
- Increase demand for yen-denominated assets.
Such flows could eventually provide support for the Japanese currency.
Dollar Remains Dominant
The yen continues to face pressure from wide interest-rate differentials between Japan and the United States. Investors increasingly expect the Federal Reserve to keep rates elevated or even raise them further, while Japanese rates remain comparatively low.
The dollar recently reached its highest level against the yen since December 1986, reflecting strong demand for U.S. assets and persistent selling pressure on the Japanese currency.
RBC Forecast
RBC Capital Markets expects the dollar to gradually weaken against the yen over the next 18 months, forecasting:
- USD/JPY around 161.8 currently.
- Dollar falling to approximately 154 yen by the end of 2027.
While that implies some recovery for the yen, the bank does not expect a rapid rebound, arguing that meaningful support is unlikely until the Bank of Japan slows its quantitative tightening program and domestic investors regain confidence in Japanese bonds.
For now, the yen remains vulnerable to higher U.S. interest rates, strong dollar demand, and ongoing capital outflows, keeping the currency near multi-decade lows.
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