UBS has slightly raised its forecast for the USD/JPY pair while maintaining its view of a decline over the next twelve months. The new estimates suggest the price will reach 142 in December 2025 (up from 140), 140 in March 2026 (up from 138), and 138 in June 2026 (up from 136), with a new target of 136 in September 2026. This adjustment reflects a slowdown in the yen’s appreciation due to a favorable global risk environment that encourages yield trades. Since mid-April, the yen has underperformed against other major currencies, declining by nearly 3% against the dollar, while G10 currencies gained an average of 1%. This weakness is attributed to the liquidation of long yen positions as market appetite for low-yielding defensive currencies decreases.
Despite these adjustments, UBS remains committed to its fundamental view of a declining USD/JPY pair, driven by the narrowing real yield gap between the US and Japan. The gap between the 10-year bond yields of the two countries has already narrowed, and UBS expects this trend to continue in the coming quarters.
According to UBS, the current USD/JPY rate of 147.00 (as of August 28) has “deviated significantly” from levels reflecting the true yield differentials, indicating room for the pair to fall toward 140. The bank believes several factors could contribute to this decline, such as the resumption of the Fed’s rate-cutting cycle in September, a potential rate hike from the Bank of Japan in December, or escalating concerns about Fed independence. The 148-150 range is considered an “overbought” level for the exchange rate, and UBS recommends selling USD/JPY on rallies and selling upside options to benefit from yield differentials. However, UBS warns that a change in Japan’s political leadership could pose a risk to the positive yen outlook, noting that if a politician supportive of dovish monetary policies takes over as prime minister, it could lead to further weakness in the Japanese currency.
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