Yen Rally May Reverse Amid Fading Rate Hike Expectations

The yen's recent rally may be coming to an end if expectations for faster Bank of Japan rate hikes and a shift by Japanese pension funds toward domestic assets fail to materialize, according to Barclays Plc.

The sharp advance in the yen has been driven by several factors, including speculation over pension-fund flows and technical factors, strategists at Barclays wrote in a note. While the break of key support around 155 leaves dollar-yen vulnerable to further declines in the near term, the structural forces weighing on the Japanese currency remain largely unchanged.

The yen may climb back toward the upper 150s per dollar if these expectations fail to come true, Barclays suggests. This reversal could be a sign that investors are reevaluating their bets on the yen's strength.