Citi Forecasts Yen to Strengthen as Japanese Investors Scale Back Foreign Holdings

Citigroup analysts are forecasting a sustained strengthening of the Japanese yen against the U.S. dollar through the end of 2027, driven by a significant reduction in overseas investment by Japanese institutions. The bank anticipates this trend will improve the yen's supply-demand dynamics and ease long-standing downward pressure on the currency.

A Shift Away From Foreign Assets

According to Citi, the primary catalyst for the yen's expected appreciation is a structural shift in investment flows. Japan holds the world's third-largest net foreign assets, with overseas investments exceeding ¥1,900 trillion. While Japanese investors executed a record repatriation of foreign assets in 2022, a recent slowdown in this activity has been observed.

However, the composition of investors is changing. While retail investment abroad through NISA accounts is slowing, institutional investors like pension funds are actively reducing their foreign exposure. Citi expects this trend to accelerate as rising domestic interest rates make Japanese assets more attractive for long-term investors, such as insurance companies.

Citi's Forecast and Market Implications

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This reduction in capital outflows is expected to provide significant support for the yen. Citi has outlined a specific forecast for the USD/JPY currency pair based on this analysis:

• The pair is projected to face a long-term ceiling in the ¥160 to ¥165 range.
• By the end of this year, the rate is expected to decline to approximately ¥155.
• A further decline to around ¥145 is forecast by the end of next year.

This outlook suggests that the fundamental drivers that have weakened the yen are beginning to reverse, potentially signaling a turning point for the currency after a prolonged period of depreciation against the dollar.