Citi Forecasts Long-Term Yen Appreciation on Capital Flow Shift

Key Takeaways

Citi anticipates a long-term trend of Japanese Yen appreciation, marking a significant shift from recent depreciation. This forecast is underpinned by the substantial improvement in Japan's balance of payments during the second quarter of 2026, the largest since 2019.

Situation Overview

Japan's balance of payments has shown a sustained net Yen purchasing trend since late last year, fueled by increased overseas investment in Japanese equities. Although the first quarter saw a temporary decline due to fiscal year-end adjustments, inbound equity investment strongly rebounded in the second quarter. Outbound portfolio investment, however, remains sluggish.

Economic and Market Impact

The underlying Yen supply and demand dynamics have clearly improved, according to Citi. While the USD/JPY pair has recently been pushed higher by Yen-selling hedges from foreign investors reacting to rising Japanese stock prices, and long-term dollar buying from Japanese SMEs, Citi expects the long-term trend to shift towards Yen appreciation. The firm projects USD/JPY could trade in the range of ¥155 to ¥160 by year-end.

Conclusion

Despite current hedging pressures, the fundamental strengthening of Japan’s capital flows indicates a sustained positive outlook for the Yen. Investors should monitor future capital flow data to confirm this evolving trend.

FAQ

Q: What is Citi's long-term outlook for the Yen?

A: Citi expects a long-term trend of Yen appreciation, shifting from depreciation.

Q: What is driving this anticipated Yen strength?

A: Improved capital flows, primarily due to increased overseas investment in Japanese equities and an enhanced balance of payments.

Q: What is the year-end forecast for USD/JPY?

A: Citi projects USD/JPY to trade between ¥155 and ¥160 by the end of the year.

Source: Investing.com