Citi sees yen strengthening long-term on improved capital flows

Citi analysts report that Japan's balance of payments demonstrated the most significant improvement in yen supply and demand dynamics since 2019 during the second quarter of 2026. This structural enhancement has been supported by sustained net yen purchasing initiated late last year, propelled by overseas capital flowing into Japanese equities despite temporary position adjustments at the fiscal year-end in March. Simultaneously, outbound portfolio investment from Japan has remained sluggish, reinforcing the underlying supply-demand balance in favor of the currency. Although USD/JPY has experienced upward pressure this year from currency hedges deployed by foreign equity investors and Japanese small-to-medium enterprises, Citi expects these dynamics to evolve over the broader macro horizon. Looking ahead, Citi anticipates the multi-year trajectory will shift from persistent yen depreciation toward long-term yen appreciation. Near-term projections indicate that the USD/JPY currency pair could trade within a range of ¥155 to ¥160 toward the end of the year as capital flows stabilize.