Morgan Stanley Sees 10% Yen Rally to ¥140 by Early 2026
Morgan Stanley strategist Matthew Hornbach warns that USD/JPY, currently trading around 156, is overstretched above its fair value. He forecasts a 10% yen rally to approximately ¥140 by early 2026, driven by expected Federal Reserve rate cuts and a decline in US 10-year Treasury yields. As yields fall, the interest-rate differential supporting the dollar weakens, paving the way for yen strength.
This shift marks a turning point for yen carry trade, where investors borrow cheap yen to fund higher-yield assets. A stronger yen raises funding costs, prompting leverage reductions and cooling of risk assets. However, Morgan Stanley expects the dollar to rebound to around ¥147 in the second half of 2026 as US fiscal stimulus and economic recovery restore yield differentials.
Risk factors include delayed Fed cuts, persistent high US yields above 4.5%, and Japan’s fiscal health. Traders and corporate treasurers should adjust hedges in two phases: long yen exposure in early 2026 and switch back to the dollar by mid-year to manage a potential 10% swing in USD/JPY.
Neutral
This forecast is focused on the foreign exchange market rather than the cryptocurrency sector. While Fed rate cuts and lower Treasury yields can boost liquidity and risk appetite, a stronger yen typically signals a shift toward risk-off sentiment and a reversal of carry trades. Crypto markets have historically reacted more to direct crypto catalysts—such as protocol upgrades, regulatory changes, or major institutional flows—than to currency fluctuations alone. Therefore, the impact on crypto trading is expected to be neutral. Short-term volatility in FX may cause minor risk adjustments, but long-term crypto trends should remain driven by crypto-specific fundamentals.