Goldman Sachs Raises USD/JPY Forecast to 165, Yen Bearish Trend Continues

Overview

This report analyzes the outlook for the yen's trajectory after recent drop to a 40-year low. Goldman Sachs notes that although the Ministry of Finance (MoF) may intervene again buying yen, under the macro backdrop where US yields remain high, recession risk is low, Japan fiscal concerns persist, and Bank of Japan (BoJ) hike pace is slow, the yen still faces continuous depreciation pressure. The report raised USD/JPY exchange rate forecast and suggests investors continue using Yen as funding currency to allocate high-yield assets.

Core views

The core driver of yen depreciation has shifted from the traditional real interest rate spread to term premium (Term Premium). Since the Liberal Democratic Party lost the House of Councillors election in July 2025, the correlation between USD/JPY and the real interest rate spread has weakened, and it is highly correlated with the widening gap in term premium of Japanese government bonds relative to US government bonds. Data shows that when Japanese term premium rises relative to the US, USD/JPY rises on average by about 0.35%. If the magnitude of change exceeds one standard deviation, the increase can reach 0.60%. FX intervention effects are limited and short-lived. Although intervention measures may suppress volatility and reset exchange rate levels in the short term, if macro fundamentals (such as widening US-JP interest rate spread) do not undergo a fundamental change, the exchange rate will quickly return to the original trend. The effect of April 2024 intervention was inferior to other rounds in recent years, confirming this view. More frequent but smaller scale interventions may occur in the future, but this cannot change the underlying logic of the yen's long-term weakness. Based on concerns about Japanese inflation and fiscal risk premium, and expectations of gradual interest rate hikes by the Bank of Japan, Goldman Sachs believes Japanese term premium will continue to rise, thereby pushing USD/JPY higher. Unless there is a negative shock to US economic growth or the Bank of Japan significantly shifts to an aggressive tightening policy (both having low probability of occurring in the next year), the yen depreciation trend will continue. Therefore, Goldman Sachs raised the USD/JPY forecast path from previous 160, 158, 155 to 162, 163, 165.

Analysis framework

The report adopted a combined method of macro fundamental analysis and quantitative correlation analysis. First, by comparing historical data, identified structural shift in key factors driving USD/JPY from 'real interest rate spread' to 'term premium spread'. Second, evaluated the effectiveness boundary of policy intervention (FX intervention) under specific macro environments, pointing out it can only delay rather than reverse trends. Finally, combining macro scenarios of fiscal policy expansion and monetary policy constraints, derived conclusion of term premium continuously expanding, thereby reaching judgment of exchange rate forecast uplift.

Methodology notes

• Macroeconomic framework

  Impact of Term Premium on Exchange Rates

  Term premium refers to additional compensation required for investors holding long-term bonds instead of rolling over short-term bonds. Report states when Japanese bond term premium rises relative to US, it means holding Yen assets attractiveness declines or risk increases, leading to Yen depreciation. This is key perspective understanding current Yen movement distinct from traditional Interest Rate Parity Theory.

• Event Game and Behavioral Finance

  Effectiveness Boundary of FX Intervention

  Report analyzed central bank behavior intervening in forex market, pointing out when macro fundamentals (like spread) strongly support one direction, intervention can only produce short-term price disturbance and volatility suppression, cannot change long-term trend. This helps readers understand why despite intervention expectations, Yen remains bearish.

Key data

• New USD/JPY Forecast Value162, 163, 165Fully raised compared to previous forecasts (160, 158, 155)
• Impact of Rising Japanese Term Premium on USD/JPYAverage rise 0.35%Weekly data since July 2025; if change exceeds 1 standard deviation, average rise 0.60%
• Yen against USD Position40-year lowRecent trading levels

Impact & implications

For investors, expectation of continued Yen weakness implies the logic of Carry Trade still holds. Report suggests continuing to use Yen along with other low-yield G10 currencies as funding currency to construct long positions in high-yield emerging market assets. For investors focusing on Japan market, need to beware of bond market volatility brought by fiscal expansion and inflation pressure, and potential frequent but small-scale FX intervention bringing short-term noise.

Risks

• Negative shock to US economic growth
• Bank of Japan shifts to more aggressive policy tightening
• Ministry of Finance conducting large-scale FX intervention causing short-term volatility

What to watch

• Relative changes in term premium between Japanese and US government bonds
• FX intervention actions and frequency by Ministry of Finance
• Bank of Japan interest rate hike path and fiscal policy moves
• US economic growth data and yield changes