Goldman Sachs lifts yen forecast to 165 as rate gap persists

Goldman Sachs raised its 12-month dollar-yen forecast to 165 from 155, betting that persistent US interest rate advantages and cautious Bank of Japan tightening will keep the yen under pressure through 2027.

"The broader macro backdrop of higher-for-longer US yields, low recession risk, lingering fiscal concerns and only gradual BoJ hikes strongly argues for continued depreciation pressure on the currency," Karen Reichgott Fishman, a strategist at Goldman Sachs, wrote in a note dated July 6.

The bank revised its three-month target to 162 from 160 and its six-month forecast to 163 from 158. The yen already trades near four-decade lows, hovering around 161.8 to 162.8 per dollar after the Bank of Japan raised rates to 1 percent in June — a 31-year high — while the Federal Reserve under Chair Kevin Warsh has signaled rate cuts may not come until 2027.

The revision implies roughly 6.5 percent additional depreciation from current levels, a move that would supercharge yen-funded carry trades and reshape risk appetite across global markets. If the Bank of Japan surprises with faster tightening or the US economy slows unexpectedly, the trade unwinds — as it did in August 2024, when a modest BoJ hike triggered a violent deleveraging that sent Bitcoin down sharply alongside global equities.

Rate Differentials Drive the Outlook

The core of Goldman's thesis rests on the interest rate gap between the US and Japan. The Federal Reserve's fed funds rate stands at 4.25 to 4.5 percent after holding steady through the first half of 2026, while the Bank of Japan's policy rate sits at 1 percent following its June hike. That 325-basis-point differential makes the yen the cheapest funding currency in developed markets.

Japan's 10-year government bond yield has climbed to around 2.8 percent, its highest in three decades, driven by mounting fiscal concerns as the government ramps up spending. Yet US Treasury yields remain more attractive, with the 10-year note yielding roughly 4.5 percent. Goldman sees no catalyst to close that gap. The bank's global FX and rates head, Kamakshya Trivedi, described the yen as "historically undervalued" but said the valuation alone is insufficient to trigger a reversal without an unexpected US recession or a BoJ pivot toward aggressive tightening.

Japan's Ministry of Finance spent over 11 trillion yen on currency intervention between April and May 2026 in an attempt to slow the yen's decline. Goldman said those efforts had only a temporary effect and expects a similar outcome if authorities intervene again.

Carry Trades and the Crypto Connection

The yen's persistent weakness has made it the preferred funding currency for carry trades, where investors borrow in yen at low rates and deploy the proceeds into higher-yielding assets. Those flows have increasingly reached digital assets. Bitcoin traded around $63,000 on Monday, with total futures open interest at $46.81 billion, according to CoinGlass data.

The risk is asymmetric. When the yen strengthens unexpectedly, carry trades unwind rapidly as borrowers rush to repay yen-denominated loans. The August 2024 episode offers a template: the BoJ's rate hike from 0.25 to 0.5 percent triggered a 15 percent drop in the Nikkei 225 over three sessions and a sharp selloff in Bitcoin, which fell below $50,000. A similar move from current levels would be amplified by the larger stock of carry trades built up over two years of yen weakness.

Not all forecasters agree with Goldman's trajectory. J.P. Morgan projects USD/JPY at 164 by year-end, broadly consistent with Goldman's view. ING forecasts a much stronger yen at 153, a divergence of roughly 12 yen that hinges on whether the BoJ accelerates its tightening cycle. Governor Kazuo Ueda has signaled willingness to normalize policy further, but each step has been measured — the June hike was preceded by six months of signaling and followed by dovish language that capped yen gains.

Goldman recommends using the yen "as a funder for high-carry EM expressions," a strategy that works as long as the rate differential persists. The next test comes July 30, when the Bank of Japan releases its quarterly outlook report, which will signal whether another rate hike is on the table for 2026.

This article is for informational purposes only and does not constitute investment advice.