Bank of America: Three catalysts could reverse the yen’s decline

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BofA Securities has upgraded its rating on the yen from bearish to neutral, highlighting three potential catalysts that, if triggered, may prompt a shift to a clearly bullish stance. This adjustment comes as the yen once again approaches the 160 mark, indicating that some Wall Street institutions are beginning to reassess the yen’s medium-term outlook.

BofA strategist Shusuke Yamada lowered the USD/JPY forecast for the end of 2026 from 157 to 152 in a report released on Tuesday, citing improving structural capital flows for the yen and vulnerabilities facing other major currencies. Yamada noted that a further shift to a clear bullish stance would require a policy change or market pressure significant enough to force a policy turnaround.

Although the yen remains under pressure in the short term, conditions for a medium-term reversal are accumulating. For investors holding short yen positions or Japanese assets, progress on the three catalysts should be closely monitored.

Three Key Catalysts: Conditions for a Bullish Turn

Yamada explicitly listed three conditions in the report that could prompt BofA to turn bullish on the yen.

First, USD/JPY rises to 160 and triggers a policy response. Second, Japan’s 10-year government bond (JGB) yields approach 3%, driving up domestic real interest rates and providing support for the yen. Third, Brent crude oil prices fall below $90 per barrel, which would improve Japan’s trade terms and relieve current account pressures.

Yamada stated that the realization of any of these conditions could send a sufficiently strong signal, either at the policy or market level, to prompt a reversal in the yen’s trajectory.

The Yen Remains Under Pressure; Intervention May Reach 10 Trillion Yen

Despite the rating upgrade from BofA, the yen’s recent performance remains weak, once again nearing the 160 level. According to Bloomberg, sources indicate that suspected intervention by Japanese authorities began on April 30. Analysis of Bank of Japan accounts shows that the intervention continued into early May, possibly reaching a scale of about 10 trillion yen (approximately $63 billion).

Yamada pointed out that since 2024, the yen has continued to weaken, with the divergence from interest rate differentials widening—this suggests that factors other than rates have started to dominate exchange rate movements.

One core rationale for BofA’s rating upgrade is the improvement in the yen’s structural capital flows. Yamada noted in the report that "improved dynamics in yen capital flows, narrowing gaps between bank loans and deposits, and rising real interest rates" are expected to provide substantive support for the yen once fiscal concerns peak and domestic yields start to rise.

Additionally, Yamada observed that Japanese equities continue to outperform their counterparts in the U.S. and Europe, a trend that helps attract capital inflows to Japan and provides fundamental support for the yen.

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