Could 2026 be the year the yen surprises to the upside

On January 5, Nicholas Smith of CLSA joined Asia Trade on Bloomberg to discuss what 2026 could hold for the Japanese yen against the US dollar.

In the conversation, Smith explains why the yen may be approaching an inflection point, pointing to shifting global interest rate dynamics and Japan’s vast overseas investment exposure as potential catalysts for a sharper-than-expected appreciation.

For those viewing today’s weak yen as an incentive to purchase Japanese property, the perspective below offers a timely and important opinion from one of Japan’s most experienced market strategists.

Topics Covered

• Japan may soon be moving interest rates higher just as the rest of the world, particularly the US, is cutting rates

• A narrowing yield gap between Japan and the US creates structural support for yen appreciation

• US political pressure for aggressive rate cuts increases the risk of a sharp policy divergence with Japan

• Japan’s massive overseas investment position becomes vulnerable if the yen starts to strengthen

• Even modest yen appreciation could erase yield gains on foreign assets, triggering capital repatriation

• Roughly $500 billion tied up in the yen carry trade could unwind quickly if currency moves turn adverse

• Japanese investors hold nearly $4 trillion in overseas assets that may rush home in a stronger-yen scenario

• Repatriation flows would reinforce yen strength, creating a self-accelerating cycle

• A previous yen carry trade unwind triggered a major global market selloff in a matter of weeks

• The scale and speed of a yen reversal remain one of the most underappreciated risks in global markets

Further Reading:

Reuters revisits the yen carry trade armed with hindsight (Patience Realty, October 2024)