Citi Sees Yen Strengthening Long-Term on Improved Capital Flows

Citi's analysts have observed significant improvements in Japan's balance of payments, particularly in yen supply and demand, which saw its largest increase since 2019 during the second quarter of 2026.

The firm notes that net yen purchasing has been sustained since late last year due to increased investment in Japanese equities by overseas investors. However, yen purchases declined in the first quarter due to position adjustments at the fiscal year-end in March, though inbound equity investment rose again in the second quarter.

Citi also points out that outbound portfolio investment remains sluggish. Despite this, the firm believes that underlying supply and demand has clearly improved.

The analysts expect a long-term shift from yen depreciation to yen appreciation, driven by increased capital flows into Japan. This year's price increase in the USD/JPY has been influenced by foreign investors selling yen hedges in response to rising Japanese stock prices, as well as dollar buying hedges from Japanese small and medium-sized enterprises.