Why OCBC sees an undervalued yen nearing a turning point

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The Japanese yen, one of the most undervalued currencies globally, is near a turning point, according to Singapore-based financial services group OCBC's research unit. "Unlike the CNY [Chinese Yuan], however, its cheap valuation has done little to ease depreciation pressures," OCBC forex strategists Sim Moh Siong and Christopher Wong said in a report on Monday. There was a rare coordinated intervention by Japan and U.S. authorities after the yen surged to multi-decade highs in July, squeezing speculative short yen positions and signaling policymakers' concerns over excessive weakness in the yen. That "intervention alone is unlikely to deliver a sustained recovery without support from domestic policy changes," OCBC said. However, that support may "finally be emerging," it added. "The [Bank of Japan] appears increasingly willing to normalize policy at a faster pace, narrowing the policy gap with other major central banks," the bank noted. The direction appears to be more supportive for the yen, though the BoJ is "still unlikely to outhawk the Fed in the near term." OCBC revised its yen forecast for end-2026 to 155 against the U.S. dollar from 160 and expects is to be at 150 by end-2027. "We expect the JPY's deep undervaluation to become a more meaningful driver of FX performance as policy and flow dynamics turn increasingly supportive," OCBC said. There is the potential for a shift in Japanese portfolio flows, and the yen could benefit from a "powerful tailwind" should there be "any meaningful move back towards domestic assets," the bank said. "We expect further policy initiatives aimed at encouraging domestic investment by Japanese investors." The bank also expects the Swiss franc to remain the preferred funding currency among investors for carry trades, as the Japanese yen strengthens. This view is reinforced by our expectation that the [Swiss National Bank] keeps policy rates at 0% through at least year-end, preserving the CHF's role as a low-yielding funding currency," it added.