USD/JPY Forecast: One Last Dollar Rally, Then a Two-Year Yen Recovery?

Market impact: mixed near-term, increasingly bearish USD/JPY over the medium term.

Westpac’s forecast implies a potential final upside extension toward 162 from the reported 159.6004 spot—approximately 1.5% higher—before a prolonged yen recovery. The immediate message is therefore not an outright bearish call: dollar-yen could remain supported if US data reinforce elevated Treasury yields or if Japanese policy normalization remains slow.

The more significant market implication is the projected decline to 154 by December 2027 and 146 by December 2028. This is notable because Westpac does not base the move on aggressive Federal Reserve easing: its assumptions keep the federal funds rate at 3.625% and allow the US 10-year yield to rise to 4.85% by late 2028. The forecast consequently points toward yen strength from factors such as a changing Japan policy/rate outlook, reduced carry demand, improved Japanese capital flows, or a gradual repricing of the dollar’s safe-haven and valuation premium rather than simply narrower US-Japan yields.

For traders, this creates a potentially unstable two-stage setup:

• Short term: upside risk in USD/JPY remains, with 162 acting as the forecast objective. A stronger-than-expected US employment report would support the dollar-yen carry trade, while weak Japanese household spending could reinforce expectations that the Bank of Japan will delay tightening.
• Medium term: rallies toward the projected peak could become more vulnerable if Japanese inflation, wages, or policy communication strengthen the case for higher domestic rates. A gradual reduction in carry positions would favor the yen even without a sharp fall in US yields.
• Cross-asset implications: sustained yen appreciation could pressure yen-funded carry trades and high-beta currencies, while potentially supporting demand for traditional defensive assets during periods of risk aversion. Japanese exporters would face a less favorable translation environment if the yen recovery becomes persistent.

The forecast should not be treated as a confirmed trend reversal. The article provides no specific Japanese interest-rate path or single catalyst, so the longer-term trajectory depends heavily on policy follow-through and incoming data.

Key risks to the interpretation:

renewed US inflation or growth strength could keep yields and USD/JPY elevated; delayed Bank of Japan normalization could extend the carry trade; and official intervention could produce sharp but temporary yen appreciation rather than the sustained recovery Westpac projects.

The next important tests are the US employment report and Japanese household-spending data. Westpac reportedly expects payroll growth of 70,000, above the 55,000 market estimate; a meaningful upside surprise would challenge the bearish medium-term yen thesis, while weak US data combined with firm Japanese consumption would increase the probability that the projected peak is already forming.