Citi sees yen strengthening on reduced foreign investment

Citi predicts the Japanese yen will gain strength against the U.S. dollar by the end of 2027 due to Japanese institutions investing less overseas. Japan ranks third in the world for net foreign assets, behind Germany and China, with overseas investments surpassing ¥1,900 trillion. In 2022, Japanese investors made their biggest-ever repatriation of foreign assets, and these holdings have been gradually recovering since then.

Retail investors have been fueling recent growth in overseas investment through NISA accounts, although this activity has slowed recently. However, institutional investors like pension funds are cutting back on foreign investments. As interest rates rise in Japan, long-term investors such as insurance companies are expected to reduce their overseas investments even further.

This change will alter the supply and demand dynamics, easing downward pressure on the yen in the long run. Citi projects that the USD/JPY pair will have a long-term ceiling of ¥160 to ¥165. Currently, the pair is expected to drop to around ¥155 by the end of this year and approximately ¥145 by the end of next year.