Morgan Stanley
2026 FX Outlook: The Year of Pivots
LIVE20 November 2025USD bearish
Back to CurrenciesBullish
USD/JPY
The great normalization
MS Forecast Path
Cross-Firm Forecast Comparison
Key Drivers
BoJ rate normalization pace
Real yield differentials
Carry positioning
MoF intervention
Fiscal policy
All Firm Targets (Dec '26)
JPMBearish164.00
INGBullish152.00
BARCBullish149.00
GSBullish148.00
BofABullish147.00
MUFGBullish146.00
DBStrongly Bullish143.00
MSBullish140.00
Key Issues for 2026
1.BoJ normalization to 0.75% by year-end is our central scenario
2.Real yield convergence between Japan and US accelerates JPY strength
3.Carry unwind risk as rate differential narrows by 150bp+
4.MoF intervention risk provides floor at 155 and asymmetric downside
5.Japanese institutional repatriation flows support yen in H2
Risk Scenarios
Bull case135-138
BoJ hikes to 1.0% and Fed cuts to 2.5%, rapid convergence
Base case140-145
BoJ to 0.75%, Fed to 3.0%, gradual normalization
Bear case158-165
BoJ pauses at 0.5%, Fed holds at 4%, carry trade resumes
Analysis Summary
Most bullish on JPY among major banks. BoJ normalization to 0.75% by year-end combined with narrowing rate differentials drives USD/JPY to 140. Real yield convergence and reduced carry appeal accelerate yen strength. Intervention risk adds asymmetry to the downside for USD/JPY.