Citi projects the Japanese yen will strengthen versus the U.S. dollar over the period through the end of 2027, citing lower levels of foreign investment by Japanese institutions as a primary driver.
According to Citi, Japan sits behind Germany and China in terms of net foreign assets, with Japanese overseas investments exceeding a51,900 trillion. The bank notes that Japanese investors conducted the largest repatriation of foreign assets on record in 2022, and that outstanding foreign asset holdings have been recovering gradually since that repatriation.
Recent growth in overseas investment has been led by retail activity routed through NISA accounts, but Citi observes that this retail-driven expansion has eased recently. At the same time, institutional investors - including pension funds - are stepping back from foreign allocations.
Citi anticipates that rising interest rates in Japan will encourage long-term domestic investors, such as insurance companies, to reduce their overseas investment exposure further. The bank states that this adjustment in behavior should gradually improve the supply and demand balance for the yen and diminish the downward pressure on the currency over time.
On specific currency projections, Citi indicates the USD/JPY exchange rate will likely encounter a long-term ceiling in the a5160 to a5165 range. The bank expects the pair to decline to roughly a5155 by the end of this year and to about a5145 by the end of next year.
Key takeaways
- Reduced overseas investment by institutional investors is central to Citi b4s forecast of a stronger yen.
- Japan b4s large stock of overseas assets, exceeding a51,900 trillion, provides context for potential shifts in currency supply and demand.
- Citi sets a long-term USD/JPY ceiling of a5160- a5165 and projects a move to about a5155 by year-end, then to around a5145 by the end of the following year.
Risks and uncertainties
- The pace and durability of retail investment through NISA accounts are slowing, creating uncertainty about future private-sector foreign investment flows.
- Institutional shifts depend on rising domestic interest rates; if rates do not increase as expected, the anticipated reduction in overseas allocations may not materialize.
- Recovery of outstanding foreign asset holdings since the 2022 repatriation has been gradual, leaving the ultimate path of overseas asset levels and their currency impact uncertain.
This coverage focuses on Citi b4s stated views and projections as described above and does not introduce additional data or commentary beyond those points.