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Investing.com -- UBS has slightly raised its USDJPY forecasts while maintaining a view that the currency pair will decline over the next 12 months.
The bank now targets 142 for December 2025 (up from 140), 140 for March 2026 (up from 138), and 138 for June 2026 (up from 136), while introducing a new target of 136 for September 2026.
According to UBS strategists Teck Leng Tan, Dominic Schnider, and Jessie Ren, the revised forecasts reflect a slower pace of yen appreciation due to a pro-risk global backdrop that favors yield-carry trades.
The yen has underperformed other major currencies since mid-April, weakening by around 3% against the dollar while G10 currencies gained an average of 1%.
This weakness stems from liquidation of net-long yen positions as market appetite for low-yielding defensive currencies diminishes.
Despite the adjustments, UBS maintains that the fundamental driver for a USDJPY downtrend—narrowing interest rate differentials between the US and Japan—remains intact.
The bank notes that US-Japan 10-year real yield differentials have narrowed and expects this trend to continue over coming quarters.
The current USDJPY rate of 147.00 (as of August 26) has "deviated strongly" from real yield differentials, according to UBS. Based on current differentials, the bank believes USDJPY has room to fall toward 140.
UBS identifies several potential catalysts for convergence, including the Federal Reserve resuming its rate cutting cycle in September, another Bank of Japan hike in December, or escalating market concerns about Fed independence.
The bank views 148-150 levels as "toppish" for the exchange rate and recommends selling USDJPY on rallies and selling upside risk for yield pickup.
A key risk to UBS’s constructive yen outlook would be a potential change in Japan’s prime minister.
The bank specifically notes that if Sanae Takaichi, who favors a dovish monetary policy stance, were to succeed Shigeru Ishiba, this could lead to yen weakness.
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