Bank of America has revised down its medium-term outlook for the U.S. dollar against the Japanese yen, trimming its year-end 2026 USD/JPY forecast to 152 from 157 and cutting its end-2027 projection to 145 from 150. The move reflects a shift from a prolonged structural bearish stance on the yen toward a more neutral view as several balance-sheet and flow indicators improve.
"We have been structurally bearish on JPY since 2021, and since 2022 have premised our outlook on a prolonged period of JPY weakness driven by structural outflows," said FX strategist Shusuke Yamada. "However, there are now signs of an improvement in structural flow dynamics," he added.
Yamada identified moderating structural yen selling as one of the central reasons for the forecast adjustment. Alongside that, he noted that other major currencies carry their own risk profiles, which affects relative currency assessments.
A principal element underlying the revision is an improvement in Japan's external balance. Using a basic balance framework - which combines the current account with direct investment flows - Japan has shifted into surplus. At the same time, the euro area's surplus has effectively disappeared and the United States continues to record a deficit in the region of 4% of GDP, according to BofA's analysis.
Contributions from AI-related goods exports have been a meaningful factor in Japan's trade picture. Exports linked to AI-related goods have grown to represent roughly 22% of Japan's total exports, helping to counterbalance a widening deficit in digital services.
Foreign direct investment patterns also feature in BofA's revised view. Rising inward FDI has increased enough to broadly offset continued growth in outward FDI. The bank points to Japan's improved standing in the Kearney FDI Confidence Index, which rose to third globally in 2025, behind only the U.S. and Canada.
On the rates side, Yamada argued that further increases in Japanese yields could become supportive for the yen rather than exerting downward pressure, provided that fiscal risks have peaked. He highlighted a narrowing bank loan-deposit gap and a turn to positive real rates on 10-year Japanese government bonds as signals that higher yields are increasingly reflecting genuine economic activity rather than being driven solely by fiscal stress.
Despite these shifts, BofA did not endorse taking straightforward long yen positions. "A clear JPY long would still require a policy shift - or FX and rate levels that would trigger such a shift - as well as a decline in oil prices," Yamada wrote. He outlined specific catalysts he would watch for, including 10-year JGB yields reaching 3%, USD/JPY moving to 160, or Brent crude falling below $90 a barrel.
The strategist also flagged several downside risks that could reverse the improved outlook. Persistently high oil prices, a slowdown in AI-related exports, an acceleration in household yen selling, and an expansion of fiscal pressures are all cited as significant threats to the yen's recovery.
By lowering its USD/JPY targets, BofA is indicating that a combination of external balance improvements, stronger inward investment, and shifting yield dynamics could weigh against the extended yen weakness seen earlier in the decade. Still, the bank underscores that a fully fledged yen recovery would require clearer policy or market-triggered changes before it would recommend decisive long positions.