Citi Forecasts Long-Term Yen Appreciation on Improving Capital Flows

The Japanese yen's long-term trend will likely shift from depreciation to appreciation, supported by a significant improvement in the nation's underlying capital flows, according to a new analysis from Citi.

A Shift in Supply and Demand

Analysts at the firm point to Japan's balance of payments data, which revealed the largest improvement in yen supply and demand during the second quarter of 2026 since 2019. This fundamental shift is underpinned by sustained net yen purchasing that has been in place since late last year.

Citi attributes this trend to two key factors:

• Increased inbound investment: Foreign investors have ramped up their purchases of Japanese equities, a trend that resumed in the second quarter after a brief pause for position adjustments at the end of the fiscal year in March.
• Sluggish outbound investment: At the same time, portfolio investment flowing out of Japan has remained weak, further improving the net flow of capital.

Near-Term Headwinds Persist

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Despite the positive long-term outlook, Citi acknowledges that the yen has faced downward pressure this year. The USD/JPY exchange rate has been pushed higher by yen-selling hedges from foreign investors capitalizing on rising Japanese stock prices.

Additionally, long-term dollar-buying hedges from small and medium-sized Japanese enterprises have also contributed to the yen's recent weakness. In light of these factors, Citi projects the USD/JPY could trade within a range of ¥155 to ¥160 toward the end of the year.

Market Implications

A structural shift from a multi-year trend of yen depreciation would have significant consequences for foreign exchange markets and international investors. The analysis from Citi suggests that while near-term weakness may continue, the fundamental support for the yen is strengthening, signaling a potential turning point for the currency after a prolonged period of decline.