ING says the yen remains roughly 20% undervalued against the dollar, and Treasury Secretary Scott Bessent is backing the late-July joint U.S.-Japan intervention to succeed. Analysts point to a possible September Bank of Japan rate hike and a new Japanese investment strategy as the conditions that could make any yen strength durable.
ING sees a 20% undervalued yen
ING Global Head of Markets Chris Turner said the yen is around 20% undervalued against the dollar, a gap the bank's fair-value model shows has persisted through 2026. Bessent, a former hedge fund portfolio manager, is backing the late-July joint U.S.-Japan intervention, the first joint yen-buying exercise since the 1998 Asian financial crisis.
Separately, ING FX strategist Francesco Pesole said the bank's Behavioural Equilibrium Exchange Rate model shows USD/JPY overvaluation above 20% throughout 2026. The model draws on terms of trade, productivity, current account balances and government spending.
Turner said Bessent's confidence stems from a conviction that the yen is undervalued, plus expectations of yen-supportive policy shifts in Japan, including a faster pace of Bank of Japan rate hikes. Markets are pricing roughly a 75% chance of a BOJ hike in September, according to the ING note.
Precedents from Sweden and Mexico
Turner cited two precedents where central bank signalling shifted currency trends. Sweden's Riksbank hedged its FX reserves in June 2023 when it viewed the krona as undervalued. Mexico's Banxico separately unwound a $7.5 billion short USD/MXN forward position in September 2023 to signal the peso was too strong, and both currencies held their levels afterward, Turner said.
According to Investing.com: "it looks like Bessent is betting the yen will appreciate", Turner said, adding that lasting appreciation depends on higher domestic returns, stronger growth and a supportive BOJ policy path.
Onshore capital is the key condition
Durable yen appreciation, Turner said, requires Japanese capital to stay onshore, tying the currency's path to Tokyo's new growth strategy, announced in July, to deploy 370 trillion yen ($2.3 trillion) of public-private investment by 2040. He cited Bank of Korea research showing Japan retains 46% of overseas investment income offshore as reinvested earnings, versus 40% for Korea, 28% for Germany and 18% for Taiwan.
Further structural moves, Turner added, could include adding Japanese government bonds to NISA accounts, or a reallocation by Japan's Government Pension Investment Fund toward domestic assets, potentially timed to the BOJ's Oct. 30 meeting, though he called such changes speculative.
ING's base case sees USD/JPY at 158 by the end of 2026 and 152 by the end of 2027.
Source: Investing.com
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