YEN: WEAK CURRENCY AND CHEAP BIG MACS — NORDEA

Nordea analyst Helge J. Pedersen notes that based on OECD purchasing power parity estimates and The Economist’s Big Mac index, the yen appears significantly undervalued against the dollar. However, in actual market trading, USD/JPY is at 159.67285, still near multi-year lows, highlighting a notable gap between valuation and reality.

**Fundamental pressures persist**

The core reason for the yen’s weakness lies in the huge interest rate differential between Japan and the U.S. Markets generally believe the Bank of Japan has been slow to hike rates, keeping real rates deeply negative, while delayed Fed rate cuts and reduced easing expectations have further reinforced the dollar’s strength. Fukuoka Financial Group chief strategist Tohru Sasaki expects that if this dynamic persists, the yen could weaken further, with USD/JPY potentially heading toward 165 by end-2026.

**Investment banks hold bearish short-term views**

Despite the undervaluation, several international investment banks remain cautious on the yen in the near term. JPMorgan’s Japan FX strategy head Junya Tanase forecasts USD/JPY to rise to 164 by end-2026, citing the BOJ’s slow tightening cycle and continued capital outflows. BofA Securities’ chief Japan FX and rates strategist Shusuke Yamada offers a more moderate outlook, seeing USD/JPY breaking above 160 in early 2026 before settling around 155 by year-end. These forecasts all suggest the yen may face further pressure before regaining upward momentum.

**Intervention signals unlikely to change the trend**

Recently, U.S. and Japanese authorities have coordinated rare intervention in the FX market to support the yen, sending a strong signal to markets. However, market analysis indicates such measures can provide only short-term relief and are unlikely to reverse the yen’s long-term depreciation trend. A fundamental turnaround would require a shift in Japan’s monetary policy direction or a substantial narrowing of the U.S.-Japan yield gap.