Citi believes the dollar-yen exchange rate is likely to move lower before the end of the year, forecasting a decline to below ¥155 per dollar despite current levels remaining close to fair value.
Using a valuation model based on data from 2017 to 2025, the bank estimates fair value for USDJPY at approximately ¥161 per dollar. A shorter-term model covering the period from 2023 to 2025 produces a fair value estimate of around ¥159 per dollar.
Current Exchange Rate Appears Fairly Valued
According to Citi, there is little evidence that the current USDJPY rate is significantly mispriced.
The bank noted that downward pressure on the Japanese yen caused by the historical strength of domestic equity markets has largely offset the positive impact from narrowing interest-rate differentials between Japan and other major economies.
As a result, Citi sees the exchange rate as broadly reflecting a balance of competing market forces.
Long-Term Upside Seen as Limited
Citi estimates that the dollar’s longer-term upside against the yen is capped at around ¥160 per dollar.
While the firm acknowledges that risk-friendly market conditions could continue to weigh on the Japanese currency in the short term, it expects a correction lower in USDJPY over the coming months.
The bank forecasts the pair will fall below ¥155 per dollar by year-end.
BOJ Policy Alone May Not Be Enough
According to Citi, continued normalization of monetary policy by the Bank of Japan may not be sufficient on its own to prevent periodic bouts of yen weakness if investor appetite for risk remains strong.
In such an environment, capital flows into higher-yielding assets could continue to support the dollar relative to the yen despite changes in Japanese monetary policy.
Intervention Still Considered Necessary
The bank believes Japanese authorities may need to continue intervening in currency markets by purchasing yen in order to stabilize the exchange rate.
Citi’s analysis suggests that current levels are broadly justified by market fundamentals, even though several opposing factors continue to influence the currency pair.
The firm’s valuation models, which incorporate different historical periods, both point to fair-value estimates that remain close to prevailing market levels.