Bank of America Securities upgraded the yen's rating from bearish to neutral, citing three potential catalysts that, if triggered, could push it to a clear bullish stance. This shift in position comes as the yen approaches the 160 level again, indicating that some Wall Street institutions are beginning to reassess the yen's medium-term outlook.

In a report released Tuesday, Bank of America strategist Shusuke Yamada stated that...The year-end 2026 forecast for the USD/JPY exchange rate has been revised down from 157 to 152.The rationale is that the structural liquidity situation for the yen is improving, while other major currencies face their own vulnerabilities. Yamada points out that a further shift to a clearly bullish stance would require a policy change, or market pressures strong enough to force a policy reversal.

While the yen remains under pressure in the short term, conditions for a medium-term reversal are building. For investors holding short yen positions or investing in Japanese assets, the progress of three catalysts warrants close monitoring.

Three catalysts: conditions for triggering a bullish outlook

In its report, Yamada explicitly listed three conditions that could trigger Bank of America to turn bullish on the Japanese yen.

First, the US dollar rose to 160 against the Japanese yen, triggering policy responses. Second, the yield on 10-year Japanese government bonds (JGB) approached 3%, pushing up domestic real interest rates and thus supporting the yen. Third, Brent crude oil prices fell below $90 per barrel, helping to improve Japan's terms of trade and alleviate current account pressures.

Yamada stated that the fulfillment of any of the above conditions could create a sufficiently strong signal at the policy or market level, driving a reversal in the yen's exchange rate.

The yen remains under pressure, and intervention could reach 10 trillion yen.

Despite Bank of America's rating upgrade, the yen has remained weak recently, approaching the 160 level again. According to Bloomberg, sources familiar with the matter revealed that Japanese authorities appeared to have intervened on April 30. Analysis of the Bank of Japan's accounts suggests the intervention continued into early May and may have amounted to approximately 10 trillion yen (about $63 billion).

Yamada points out that since 2024, the yen has continued to weaken, and the divergence from the interest rate differential has been widening, indicating that exchange rate trends have become dominated by factors other than interest rates.

One of the key reasons Bank of America upgraded its rating was the improvement in the structural liquidity situation of the yen. Yamada mentioned in its report that..."Improved yen liquidity dynamics, a narrowing gap between bank loans and deposits, and rising real interest rates" are expected to provide substantial support for the yen as domestic yields begin to rise after fiscal concerns peak.

In addition, Yamada pointed out that the Japanese stock market continues to outperform its counterparts in the US and Europe, a trend that helps attract capital inflows to Japan and provides fundamental support for the yen.