The following is a comprehensive rewrite of the Forex article titled “Scotiabank: Markets Have Underestimated Yen Support, End-2026 USD/JPY Forecast at 125,” originally published on ExchangeRates.org.uk and attributed to James Elliot. This rewritten version builds upon the original ideas with additional context and clarity, extending the content to exceed 1000 words.
—
# Scotiabank Analysts Predict Significant Yen Strength by End of 2026: USD/JPY Forecast Revised to 125
## Overview
According to a recent analysis released by Scotiabank, financial markets may be significantly mispricing the long-term support for the Japanese Yen (JPY). The bank’s strategic forecast indicates a compelling case for Yen appreciation over the next several years, with the USD/JPY exchange rate predicted to fall to 125 by the end of 2026. This projection reflects a potential reversal from recent trends and underscores several key macroeconomic and monetary dynamics influencing the USD/JPY currency pair.
As global economic forces begin to shift and central bank policies evolve, Scotiabank economists believe that current market pricing underestimates the resilience of the Japanese Yen. The report outlines a host of factors likely to drive stronger demand for the Yen, particularly as the Bank of Japan (BoJ) transitions away from its ultra-loose monetary stance and the Federal Reserve edges closer to rate normalization.
## Current Market Context
In the current market environment, the Japanese Yen remains near multi-decade lows against the US Dollar. The USD/JPY pair has traded above 160, reaching levels not seen since the 1990s. While this weakness primarily stems from divergent interest rate policies between the BoJ and the US Federal Reserve, Scotiabank analysts suggest this is a short-lived phenomenon.
### Key Influences Supporting Weak JPY:
– Japan’s ultra-low negative interest rate policy
– Extensive bond yield curve control employed by the BoJ
– High interest rate differential favoring the US Dollar
– Global market appetite for yield leading to carry trade inflows
– Intervention hesitation by Japanese authorities
Despite these near-term pressures, Scotiabank emphasizes that the medium- to long-term outlook is not as bearish for the Yen as current prices suggest.
## Factors That Could Drive Yen Resurgence Through 2026
Scotiabank’s forecast for a stronger Yen over the next two to three years is built upon a convergence of economic and policy developments that are likely to erode the USD/JPY gap. These include a combination of narrowing rate differentials, the end of ultra-loose monetary policy in Japan, and broader global market shifts favoring risk aversion and currency rebalancing.
### 1. Expected BOJ Policy Normalization
One of the principal drivers behind Scotiabank’s bullish Yen forecast is the expectation that the Bank of Japan will eventually normalize monetary policy after decades of accommodation. This shift is anticipated to gradually close the interest rate gap between the Yen and the US Dollar, reducing incentive for speculative short positions against the Yen.
– BoJ has already taken initial steps by ending its Yield Curve Control policy.
– Negative interest rates have been dropped, marking a historic pivot.
– Future rate hikes are now considered plausible if inflation becomes persistent.
– Even modest tightening could dramatically bolster the JPY, given market sensitivity.
As the central bank moves closer to policy normalization, capital outflows from Japan may begin to reverse, strengthening the Yen.
### 2. Diminishing Yield Gap as US Rates Peak
Scotiabank analysts argue that the US Federal Reserve is near or at the peak of its current interest rate cycle. Any future rate cuts from the Fed would gradually erode the interest rate differential that has strongly favored the US Dollar over the Yen since 2022.
– Federal Reserve expected to start the easing cycle in 2025–2026.
– Recent inflation data signals softening pressures, reducing urgency for further Fed hikes.
– Any dovish pivot from the Fed
Explore this further here: USD/JPY trading.