Bank of America Predicts Yen to Weaken to 160 Against the Dollar by End of 2025
Bank of America (BofA) has issued a stark warning for the Japanese yen (JPY), forecasting a significant depreciation against the US dollar, reaching an exchange rate of 160 by the end of 2025. This projection stands in stark contrast to the market consensus of 141, as reported by Bloomberg, indicating a considerably more bearish outlook from BofA. While the path to this level is anticipated to be volatile, influenced by shifts in US policy, the overall trajectory points towards a weaker yen.
The bank’s analysis highlights several key drivers behind this anticipated depreciation. Initially, the aftermath of the November 2024 US presidential election is expected to see a surge in the dollar, fueled by expectations of fiscal stimulus driving up US Treasury yields. However, BofA anticipates a subsequent correction in the USD/JPY pair in early 2025. This correction could be triggered by risk aversion in the market, potentially sparked by policy changes such as increased tariffs or tighter immigration controls under the new US administration, which could temporarily boost the yen.
However, this respite for the yen is expected to be short-lived. BofA forecasts a significant acceleration of long-term capital flows from Japan to the US in the latter half of 2025. This outflow is predicted to be driven by anticipated deregulation in the US, encouraging Japanese firms to increase foreign direct investment, mirroring patterns observed during the first Trump presidency. Furthermore, underlying structural factors within Japan, including unfavorable demographics and the allure of attractive US policy incentives, are expected to contribute to this capital flight, further weakening the yen.
The divergence in monetary policy between the US Federal Reserve and the Bank of Japan (BoJ) is another key factor underpinning BofA’s bearish yen forecast. While the Fed is expected to maintain a steady policy rate between 3.75-4% throughout 2025, eventually stabilizing at 4.25%, the BoJ is projected to pursue a more gradual path of rate increases, reaching just 0.75% by the end of the year. This persistent interest rate differential is expected to fuel carry trades, where investors borrow in low-yielding currencies like the yen to invest in higher-yielding assets denominated in US dollars, further exacerbating downward pressure on the Japanese currency.
Despite this overwhelmingly bearish outlook, BofA acknowledges potential risks to its forecast, primarily stemming from the trajectory of the US economic cycle. Slower-than-anticipated US growth or aggressive currency intervention by the US government could potentially disrupt the predicted depreciation of the yen. Domestically, Japan’s own fiscal challenges and the ongoing lack of significant structural reforms could further amplify the yen’s weakness.
While short-term fluctuations may suggest a strengthening yen, BofA cautions against interpreting this as a reversal of the long-term trend. The bank maintains its conviction in the underlying factors driving the yen’s decline, emphasizing the anticipated impact of capital flows, monetary policy divergence, and structural economic differences between the US and Japan. Investors are advised to approach short-term yen strength with caution, keeping in mind BofA’s longer-term bearish trajectory for the currency. This significant divergence from consensus forecasts underscores the substantial downside risks facing the yen in the coming years, according to BofA’s analysis.
