UBS Adjusts Forex Forecast
The latest foreign exchange outlook released by UBS shows that they have significantly raised their forecast for the USD/JPY rate by the end of 2025 from 130 to 143, and adjusted the expectation for the end of 2026 from 130 to 140. This move reflects that the uncertainty of Japan's domestic political landscape is becoming an important variable affecting the foreign exchange market.
Political Factors as Key Drivers of Exchange Rate
UBS strategists point out that despite the continued inflationary pressures in Japan and the robust performance of the stock market, the political situation is being interpreted by the market as a significant reason for the Bank of Japan's dovish stance. Analysts believe that as Japan's domestic political situation changes frequently, investors' confidence in the monetary policy outlook has been shaken, thereby raising expectations of yen depreciation.
Market Has Absorbed Rate Hike Expectations
Despite the complex political environment, the Bank of Japan is still expected by the market to keep rates unchanged before the early 2026 meeting. UBS mentioned that the market has almost completely absorbed the scenario where the Bank of Japan will not raise rates in the short term, so even if the yen benefits partially from monetary policy tightening expectations, the support impact is relatively limited.
Strong Stock Market and Decreasing Volatility
In addition to policy factors, UBS also noted that the continued strength of the Japanese stock market and decreasing market volatility have also weakened the yen's appeal as a safe haven. Investors are more inclined to invest in high-risk assets such as the stock market, leading to the yen's consistently weaker performance in the international market. Analysts add that this phenomenon is difficult to reverse in the short term.
Possibility of “Plaza Accord 2.0” Dismissed
There was speculation in the market about whether there might be international coordinated intervention similar to the "Plaza Accord" of the 1980s to substantially appreciate the yen. However, UBS believes there are currently no signs that major economies intend to do so. Even if the USD/JPY rate falls to the lower end of the 140-150 range, it would be difficult to sustain a strong yen trend in the long term.
Weak Outlook for the Dollar
In contrast to the yen's political risks, the dollar itself also faces downward pressure. UBS expects that the continued weakness of the U.S. labor market will drag down Treasury yields, especially the downward movement at the short end of the yield curve, keeping the dollar in a weak position. This means that the dollar's overall performance against other major currencies may be suppressed.
Strategic Thinking for Global Investors
In the current environment, investors need to balance between political risks and macroeconomic fundamentals. The yen's weak trend may attract some carry trades, but if Japan's domestic political situation further deteriorates, volatility could rise again. Meanwhile, the weakening of the dollar suggests that funds might be reallocated between Asian and European markets.
Looking Ahead
UBS's adjustment provides the market with a new reference framework: political uncertainty and policy expectations are jointly shaping the USD/JPY trajectory. In the coming year, if the political situation in Japan stabilizes and inflation remains under control, the yen might gain temporary support; conversely, if uncertainty intensifies, it is not impossible for the USD/JPY to break through 145 or even higher levels.
