Overview
In an October 8, 2026 Bank of America research note, analysts Shusuke Yamada and Izumi Devalier observed that the Japanese yen’s depreciation between the second quarter of 2025 and the second quarter of 2026 was confined to offshore trading hours in London and New York, with no weakening during the Tokyo session. This pattern contrasts with the 2021‑mid‑2024 period, when the yen fell during both domestic and overseas sessions.
Drivers of Offshore Weakness
The analysts linked the offshore decline to three primary factors: (i) an artificial‑intelligence‑driven rally in Japanese equities that heightened currency‑hedging activity by international investors, thereby adding yen‑selling pressure; (ii) the Bank of Japan’s gradual monetary tightening, which made the yen an attractive funding currency; and (iii) improvements in Japan’s balance of payments that helped stabilise the yen during Tokyo hours.
Mitigating Influences
Pressure on the yen eased after coordinated Japanese and U.S. currency‑intervention actions in July 2026 and as market expectations shifted toward a faster pace of BoJ tightening. Investor sentiment also moved markedly: a survey in August showed roughly 60 % of respondents were bearish on the yen, a share that fell to about 30 % in September.
Policy Outlook and Rate Projections
The research team projected that the BoJ would raise its policy rate by 25 basis points in December 2026, March 2027 and July 2027, bringing the rate to 2 %.
Market Positioning
Despite the yen’s offshore weakness, the strategists maintained a short recommendation on the USD/JPY pair, arguing that the balance of risks favours yen appreciation even as the dollar remains strong. They warned that renewed intervention could become a consideration if USD/JPY climbs above 160.
Potential Catalysts
A correction in AI‑related equities could further support the yen by prompting investors to unwind currency hedges and by dampening global risk appetite. Such a downturn could also narrow interest‑rate differentials in the yen’s favour, even if the BoJ slows its tightening cycle.