Citi says Japan's balance of payments recorded the most pronounced improvement in the balance between yen supply and demand since 2019 during the second quarter of 2026. The bank attributes this change to a revival in net yen purchases that has been present since late last year.
According to Citi, the reopening of foreign appetite for Japanese equities has been a key factor supporting sustained net yen buying. The bank notes that yen purchases eased in the first quarter of 2026 as investors adjusted positions around Japan's fiscal year-end in March, but that inbound equity investment picked up again in the second quarter.
At the same time, Citi observes that outbound portfolio investment from Japan has remained subdued, a dynamic that contributes to an improved overall supply-demand balance for the currency. The firm characterizes the underlying shift in supply and demand as clear, suggesting a durable change in the forces acting on the yen.
On exchange-rate dynamics, Citi argues the longer-term picture is likely to flip from yen depreciation to yen appreciation. The bank also explains some of the forces behind recent moves in the USD/JPY rate this year: foreign investors have been selling yen to hedge gains from rising Japanese stocks, while Japanese small and medium-sized enterprises have been buying dollars on the long side as hedges.
Looking ahead, Citi projects the USD/JPY rate could be trading in a band of ¥155 to ¥160 toward the end of the year. That range reflects the bank's view of how the balance between overseas investment into Japanese equities, limited outbound portfolio flows, and corporate hedging activity may influence the currency market over the remainder of the year.
While the bank highlights improvements in capital flows and clearer supply-demand conditions for the yen, it limits its projection to the stated range without issuing further quantitative forecasts beyond the year-end window.