The Japanese yen’s decline since 2025 has been confined to offshore trading hours, according to a Bank of America analysis. The research note, published on October 8, revealed that the yen’s depreciation between Q2 2025 and Q2 2026 occurred solely during London and New York trading sessions. This contrasts with the period from 2021 to mid-2024, when the yen weakened during both Tokyo and overseas sessions.
Analysts Shusuke Yamada and Izumi Devalier attributed the yen’s stability during Tokyo hours to improvements in Japan’s balance of payments. They identified the AI-driven equity rally and the Bank of Japan’s (BoJ) gradual monetary tightening as key factors contributing to the yen’s weakness offshore. Strong Japanese equity performance led to increased currency hedging by international investors, adding to yen-selling pressure. The yen’s role as a funding currency was also reinforced by expectations of slow BoJ interest rate hikes.
The pressures on the yen have eased following coordinated currency interventions by Japan and the US in July and rising expectations of faster BoJ tightening. Investor sentiment has shifted, with the proportion of bearish yen investors dropping from 60% in August to 30% in September. The research team anticipates the BoJ will raise its policy rate by 25 basis points in December 2026, March 2027, and July 2027, reaching 2%.
Despite continued dollar strength, the strategists recommend shorting the yen, arguing that risks favor yen appreciation. They warned that renewed intervention could occur if the USD/JPY rate surpasses 160. A correction in AI-related equities could also support the yen by reversing hedges and weakening global risk appetite, narrowing interest rate differentials in the yen’s favor.