BofA Lowers USD/JPY Forecast as Outlook for Japanese Yen Improves
Bank of America has reduced its year-end forecast for the USD/JPY currency pair to 152 from 157, signalling a more neutral medium-term view on the Japanese yen after maintaining a bearish stance for several years.
According to FX strategist Shusuke Yamada, the bank had expected prolonged yen weakness since 2021, largely driven by persistent structural capital outflows from Japan. However, signs are emerging that these underlying dynamics may be shifting.
Structural Pressure on the Yen Begins to Ease
One of the main factors behind the yen’s long-term decline has been consistent structural selling. Bank of America now believes this trend is moderating, while other major currencies are facing their own economic and geopolitical risks.
The bank also lowered its USD/JPY forecast for the end of 2027 to 145, down from 150. This new projection sits slightly below current market expectations and forward pricing levels.
Japan’s External Balance Shows Signs of Strength
A major reason behind the revised outlook is improvement in Japan’s external financial position. On a basic balance basis — combining current account performance with direct investment flows — Japan has returned to surplus territory.
Meanwhile, the eurozone’s surplus has largely disappeared and the United States continues to run a deficit equivalent to roughly 4% of GDP.
AI Exports Become an Important Growth Driver
Exports linked to artificial intelligence technologies have become an increasingly important support for the Japanese economy. AI-related products now account for around 22% of Japan’s total exports, helping offset a growing deficit in digital services.
At the same time, foreign direct investment (FDI) flowing into Japan has increased enough to broadly balance continued outward investment. Japan climbed to third place globally in the 2025 Kearney FDI Confidence Index, behind only the United States and Canada.
Higher Japanese Bond Yields Could Support the Yen
Bank of America argues that further increases in Japanese bond yields may become supportive for the yen rather than weakening it, provided fiscal risks stabilise.
Indicators such as a narrowing bank loan-to-deposit gap and positive real returns on 10-year Japanese government bonds suggest yield increases are increasingly tied to genuine economic activity instead of fiscal concerns alone.
Why BofA Is Not Yet Bullish on the Yen
Despite the improving outlook, the bank stopped short of recommending aggressive long positions on the Japanese currency.
According to Yamada, stronger conviction on a bullish yen outlook would likely require additional catalysts, including policy changes, shifts in interest rates, or lower oil prices.
The strategist identified several potential triggers:
- 10-year Japanese government bond yields rising to 3%
- USD/JPY reaching 160
- Brent crude oil falling below $90 per barrel
Risks That Could Weaken the Japanese Yen Outlook
Several downside risks remain for the yen, including:
- Persistently elevated oil prices
- Slower growth in AI-related exports
- Increased household selling of yen assets
- Rising fiscal pressures within Japan
These factors could limit further yen strength despite improving structural trends in the economy.
