Global investment bank Citi expects the Japanese yen to strengthen over the medium to long term as capital inflows into Japan accelerate, reversing recent depreciation trends.
The bank’s outlook follows Japan’s balance of payments recording its most significant improvement in yen supply and demand since 2019 during the second quarter of 2026. Citi noted that net purchases of the yen have been sustained since late 2025, driven primarily by increased foreign investment in Japanese equities. Portfolio outflows from Japan, however, remain subdued, contributing to the improved underlying demand for the currency.
The yen’s recent resilience comes after a first-quarter pullback in purchases, attributed to fiscal year-end position adjustments. The second quarter marked a rebound, with Japan’s balance of payments reflecting the strongest adjustment in currency flows in seven years.
Citi projects the USD/JPY exchange rate to trade within a range of ¥155 to ¥160 through the end of 2026. The bank attributes near-term upward pressure on the pair to short-yen hedging by foreign investors responding to gains in Japanese equity markets, as well as long-term dollar-buying hedges executed by Japanese small and medium-sized enterprises.
The improved capital flow dynamics suggest a structural shift in Japan’s currency demand, potentially signaling a reversal from years of yen depreciation to a period of appreciation.
