Morgan Stanley expects yen to decline as traders rebuild carry trades

Morgan Stanley is betting against the yen, projecting the Japanese currency will slide to roughly 163 per US dollar by late July 2026. The call is built on a straightforward thesis: the yen’s recent rally was a head fake, driven by carry trade unwinding and speculation about pension fund repatriation, not any real shift in the economic backdrop. With USD/JPY currently hovering around 154, that forecast implies a roughly 6% decline in the yen from here. Morgan Stanley’s strategists, including Koichi Sugisaki, David Adams, and Andrew Watrous, are recommending clients go long on the dollar-yen pair with a stop-loss set at 150. Why the yen rallied, and why Morgan Stanley thinks it won’t last The yen’s recent strength caught some traders off guard. But Morgan Stanley’s team argues it was largely a mechanical event rather than a fundamental one. Specifically, the rally traced back to speculation that Japan’s Government Pension Investment Fund, one of the largest pools of capital on the planet, might repatriate overseas holdings back into yen-denominated assets. That speculation triggered a wave of carry trade unwinding, where investors who had borrowed cheap yen to buy higher-yielding cu...