Morgan Stanley expects USD/JPY to climb toward 163 by late July 2026, arguing the yen's recent rally reflects unwinding carry-trade positioning rather than a shift in fundamentals. The bank recommends going long the dollar-yen pair with a stop-loss at 150, even as the Bank of Japan continues raising rates.
Morgan Stanley is telling clients to bet against the yen, projecting USD/JPY will reach roughly 163 by late July 2026 from around 154 now. That call implies a roughly 6% decline in the yen from current levels. Strategists Koichi Sugisaki, David Adams, and Andrew Watrous recommend going long the dollar-yen pair with a stop-loss set at 150.
Why the bank sees the yen rally as temporary
The team argues the yen's recent strength was mechanical, not fundamental. Speculation that Japan's Government Pension Investment Fund might repatriate overseas holdings into yen-denominated assets triggered a wave of carry-trade unwinding, as investors who had borrowed cheap yen to buy higher-yielding currencies rushed to close positions.
That interest rate differential between the US and Japan, the force that makes carry trades attractive, has not meaningfully narrowed, according to Morgan Stanley. That gap still makes borrowing in yen to hold dollar assets profitable, and the bank expects traders to rebuild those positions.
The Bank of Japan's balancing act
The Bank of Japan holds its policy rate at 1% and Morgan Stanley forecasts hikes to 1.25% in October 2026 and 1.5% by March 2027. Tightening should support the yen in theory, but the bank is moving slowly from an extremely low base while US rates stay elevated, so the net effect still favors yen weakness, per Morgan Stanley's analysis.
Coordinated US-Japan action around the 163 level provided temporary yen support in late July 2026. Morgan Stanley's target sits right at that prior intervention threshold, suggesting the bank expects markets to test those levels again before authorities intervene once more.
Risks to the trade
The stop-loss at 150 marks where Morgan Stanley would abandon the thesis. A faster-than-expected BOJ hiking cycle would narrow rate differentials more aggressively. Actual large-scale GPIF repatriation, rather than speculation about it, would create sustained yen buying. A sharper US economic slowdown that forces the Federal Reserve to cut rates would also compress the yield advantage that makes yen carry trades attractive.
Source: Crypto Briefing
Trading involves risk.
Risk Disclaimer
