Yen A Recovery Play for 2026: Intesa

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The Japanese yen should turn a corner this year says Intesa Sanpaolo.

The European bank says in a currency note released Friday that after years of "extreme weakness", the Yen is viewed as a high-potential "recovery" play for 2026.

"While USD/JPY remains volatile (currently trading near 156-157), we expect it to decline toward 146–148 by year-end," says Sergio Capaldi, Fixed Income Strategist at Intesa Sanpaolo.

Capaldi's view is based on two arguments.

First, policy normalisation: The Bank of Japan (BoJ) is finally exiting ultraloose policy, with at least two rate hikes expected in 2026 to take the policy rate toward 1.00%.

Second, yields convergence: As U.S. yields fall and Japanese yields rise, the narrowing "yield gap" is expected to trigger a gradual unwinding of yen-funded carry trades.

This yield gap remained the single most important structural drag on the currency:

Japan maintained much lower interest rates than other major economies for most of 2025, even after policy adjustments.

As a result, higher yields in the U.S. and parts of Europe continued to attract capital away from Japan, weighing on the yen.

Although the Bank of Japan moved away from ultra-loose settings, markets judged the changes as incremental rather than decisive.

The risk is that this view holds sway in 2026, even as the Federal Reserve lowers rates.