Yen weakness since 2025 has been limited to offshore hours: analysis
The Japanese yen’s depreciation since 2025 has occurred exclusively during offshore trading hours, according to Bank of America, reflecting changing currency market dynamics.
In an October 8 research note, analysts Shusuke Yamada and Izumi Devalier said the yen’s weakness between the second quarter of 2025 and the second quarter of 2026 was driven entirely by trading in London and New York.
This marked a significant departure from 2021 through mid-2024, when the Japanese currency depreciated during both Tokyo and overseas sessions.
The analysts attributed the yen’s stabilisation during Tokyo hours to improvements in Japan’s balance of payments, while identifying the artificial intelligence-driven equity rally and the Bank of Japan’s gradual monetary tightening as likely contributors to offshore weakness.
Strong Japanese equity performance encouraged currency hedging by international investors, generating additional yen-selling pressure.
Meanwhile, expectations that the BoJ would raise interest rates too slowly reinforced the yen’s attractiveness as a funding currency.
However, these pressures have moderated following coordinated Japanese and US currency intervention in July and growing expectations of faster monetary tightening.
Investor sentiment has also shifted. In August, approximately 60% of surveyed investors were bearish on the yen because they believed the BoJ was behind the curve. That proportion fell to 30% in September.
The research team expects the BoJ to raise its policy rate by 25 basis points in December 2026, March 2027 and July 2027, reaching 2%.
The strategists maintained their recommendation to short USD/JPY, arguing that the balance of risks favours yen appreciation despite continued dollar strength.
They also warned that renewed intervention could become a consideration if USD/JPY rises above 160.
A correction in AI-related equities could further support the yen by reversing currency hedges and weakening global risk appetite.
Such a downturn could also narrow interest rate differentials in the yen’s favour, even if the BoJ slows its tightening cycle.
