Yen Gains Investor Confidence Amid Undervaluation and Reform Hopes

Global Investor Preferences for 2026: Yen and Gold

Global investors are increasingly favoring the Japanese yen and gold as key currency plays for 2026, according to the latest Bank of America survey. Roughly a third of the 170 fund managers polled by the bank anticipate the yen will deliver the best returns next year, a surprising pick given its poor performance in 2025 according to the same survey. Gold and the U.S. dollar follow closely behind, with only 3% of respondents selecting the British pound as their top currency choice per the bank's analysis.

The yen's strong showing in the poll contrasts with its underwhelming returns this year. Despite gaining just 1% against the dollar, the yen remains the worst performer among the G10 currencies according to Bloomberg analysis. Analysts point to the Bank of Japan's uncertain path for rate hikes and the recent election of Prime Minister Sanae Takaichi as factors behind the yen's weakness. Takaichi has championed an accommodative monetary policy and is set to unveil a major spending package that could further weaken the yen in the near term.

Gold's appeal is also on the rise, buoyed by central bank purchases and a surge in demand from retail investors amid global trade tensions and geopolitical uncertainties. The Bloomberg dollar index has fallen about 7% this year, setting it up for its worst annual performance since 2017. The yen's undervaluation, however, has drawn attention from investors who see it as an attractive long-term play, particularly as Japanese equities remain underweighted in global portfolios according to the survey.

Drivers of Yen Optimism

Investor interest in the yen is partly driven by its historical undervaluation, which reflects a lack of investment in Japanese assets. The same investors surveyed by Bank of America hold a net 4% underweight in Japan's equities, a stance they have maintained for over a year. This underweight position suggests that a shift in sentiment could lead to a re-rating of Japanese assets, potentially boosting the yen's value.

The yen's poor performance this year is also linked to the Bank of Japan's cautious approach to raising interest rates. Unlike many of its global counterparts, the BoJ has not aggressively tightened monetary policy, which has kept the yen weak against the dollar. This situation could change in the coming months if Japanese authorities decide to intervene to support the yen, a possibility that has already triggered speculation in markets.

Outlook for Gold and the Dollar

Gold continues to benefit from strong demand, particularly from central banks looking to diversify their reserves. Goldman Sachs estimates that central banks purchased 64 tonnes of gold in September, up from 21 tonnes in August. This trend is expected to continue, with the firm projecting gold prices to reach $4,900 per ounce by the end of 2026.

Meanwhile, the U.S. dollar faces headwinds as uncertainty over Donald Trump's policies persists. The Bloomberg dollar index has declined 7% this year, and further weakness could be on the horizon if economic data surprises investors. Strong employment or inflation numbers might delay Federal Reserve rate cuts, which could weigh on global liquidity and asset prices.

What This Means for Investors

For investors, the yen's potential rebound offers an opportunity to capitalize on undervaluation and structural reforms in Japan's economy. Bank of America notes that Prime Minister Takaichi's administration is pursuing aggressive fiscal measures in key sectors like semiconductors, energy transition, and defense. These policies, combined with wage growth in spring 2026, could bolster domestic demand and support the yen's long-term outlook.

Gold remains a hedge against geopolitical and economic risks, and its appeal is likely to persist as central bank buying continues. For the dollar, investors must remain cautious as the currency faces a difficult path ahead. However, the U.S. dollar's role as a global reserve currency may provide a floor for its value, even amid broader market volatility.