Yen bottom signal? Morgan Stanley warns: The yen will appreciate by 10% in early 2026, and US bond yields have stabilized and are declining.

Morgan Stanley estimates that the USD/JPY will fall back to 140 in early 2026, introducing variables for global arbitrage trading and corporate financial layouts (Background: The yen has fallen below new lows in October! High City Saimai has injected 21.3 trillion yen in fiscal spending to save Japan, raising concerns of a vicious cycle) (Background Supplement: The Bank of Japan hints at “rate hikes possible in December”: Is the yen preparing for a rebound after hitting the bottom?) The USD/JPY is hovering around the 156 level, seemingly establishing a stable exchange rate range, but Morgan Stanley analyst Matthew Hornbach warns investors in an internal report that cracks are appearing in the high wall of exchange rates. The Morgan Stanley strategy team points out that the exchange rate has risen significantly above “fair value,” and as U.S. bond yields decline, the yen is expected to appreciate nearly 10% in the first quarter of 2026, targeting 140. Key messages on the USD/JPY exchange rate The current price level of 157 is built on the “high yields of U.S. bonds” which is like quicksand. Morgan Stanley's strategy chief Matthew Hornbach's model shows that the USD premium is heavily reliant on high interest rate differentials. If the market forecasts, as reported, that the Federal Reserve will cut rates three times before mid-2026, U.S. 10-year bond yields are bound to retreat, pulling the supporting pillar of the dollar away. Hornbach emphasizes: “This is not a crash, but a return to gravity. When the interest rate differential narrows, overvalued prices will eventually revert to fundamentals.” For traders, 156 is no longer an “impenetrable” defense line, but rather like gains floating in the clouds, which could easily pull back at the slightest disturbance. The moment for arbitrage trading The yen has long been regarded as the world's largest “low-interest ATM.” Funds borrow yen through carry trades, exchange for high-yield currencies, and then invest in risk assets. If the yen appreciates by 10% as expected, the popular model of the past decade will face headwinds, with rising funding costs meaning leverage must contract, and risk assets will cool simultaneously. It is worth noting that this wave of yen strength is not driven by hawkish policy from the Bank of Japan. Even if the market speculates that the BOJ might raise the policy rate to 0.75%, it remains tepid on a global scale. In other words, the momentum of the yen comes more from a “weaker dollar” rather than a “stronger Japan.” Possible rebound in the second half of 2026 For bulls, this does not mean that the yen will enter a long-term bull market. According to Morgan Stanley's annual outlook, when the rate-cutting cycle comes to an end, coupled with the Trump administration's ongoing economic stimulus through tax cuts and infrastructure investments, U.S. growth momentum is expected to recover in the second half of 2026, with the USD/JPY likely rebounding to 147. At that time, carry trades may make a comeback, attracting global funds back to USD assets. For corporate finance executives, this means that hedging strategies need to be adjusted in segments: risks of yen appreciation should be locked in during the first half of the year, while preparing for a possible counterattack from the dollar in the second half. Missing the time window, a 10% swing in exchange rates could erode an entire year’s profits. If the script goes awry No model, no matter how sophisticated, can prevent the black swans of reality. If the Trump administration's tariff policies push inflation higher again, forcing the Federal Reserve to delay rate cuts, and keeping 10-year U.S. bond yields above 4.5%, the target price of 140 could turn into a mirage. Similarly, if Japan's public finances deteriorate, confidence in yen assets may also be eroded. Therefore, Morgan Stanley does not outline an absolute singular path for the market, but a dynamic “trading calendar”: go long on the yen in early 2026, then reverse to go long on the dollar in mid-year. For Silicon Valley tech giants and Wall Street macro funds, this 10% exchange rate fluctuation is not just a number on a screen, but a signal that assets and liabilities must be strategically positioned in advance. Looking back at the 156 level at the end of 2025, it seems solid, but undercurrents are swirling. Exchange rates are like a tightly pulled tightrope, with interest differentials, yields, and policy gravity alternating in force; once the balance changes, prices will inevitably slide toward a new equilibrium point. For investors, the question now is not “Will 140 come?” but rather “When it does, are your positions ready?” Related reports The world's first yen stablecoin JPYC goes live! Approved by the Japan Financial Services Agency, backed by Japanese government bonds, supporting multi-chain deployment… The Bank of Japan is extremely hawkish: rates should be raised to at least 1% by 2025, and the yen has risen above 152, hitting a two-month high. Is the yen finally bottoming out? Wall Street hedging funds are “buying the dip” on yen, betting on exchange rate appreciation. <Yen Bottom Signal? Morgan Stanley warns: yen will appreciate 10% in early 2026, U.S. bond yields have stabilized and declined> This article was first published on BlockTempo, the most influential blockchain news media.