Yen Bearish Voices Build for 2026 on Cautious BOJ Policy Path

Core Viewpoint - The Bank of Japan's recent interest rate hike has not provided a lasting boost to the yen, leading to increased skepticism about the currency's structural weaknesses and the outlook for its recovery [1]. Group 1: Yen Forecasts and Market Sentiment - Strategists from JPMorgan Chase & Co. and BNP Paribas SA predict the yen could weaken to 160 per dollar or lower by the end of 2026, influenced by significant US-Japan yield gaps, negative real interest rates, and ongoing capital outflows [2]. - The yen has gained less than 1% against the US dollar this year after four consecutive years of decline, with a brief rise past 140 per dollar in April before losing momentum due to uncertainties surrounding US tariff policies and political risks in Japan [3]. - Junya Tanase, chief Japan FX strategist at JPMorgan, holds a particularly bearish forecast for the yen, predicting it could reach 164 per dollar by the end of 2026, citing weak fundamentals and potential cyclical forces that may further depress the currency [4]. Group 2: Economic Indicators and Market Dynamics - Current market expectations indicate that the next Bank of Japan rate hike is not fully anticipated until September, while inflation remains above the central bank's 2% target, putting additional pressure on Japanese government bonds [5]. - The resurgence of carry trades, where investors borrow low-yielding yen to invest in higher-yielding currencies, is creating additional challenges for the yen's recovery, with leveraged funds showing significant bearish positions on the currency [6]. - Analysts suggest that global macro conditions in the coming year may support risk sentiment, which could benefit carry strategies and keep the dollar-yen exchange rate elevated, with expectations of the dollar-yen rising to 160 by the end of 2026 [7].