The Japanese yen continues to trade significantly below its fair value against the U.S. dollar, according to a new analysis released by UBS on Friday.

UBS estimates the USD/JPY fair value at 125, making the yen one of the "cheapest" currencies in the G10 group. Despite this undervaluation, the banknotes that arguments for the currency pair to converge with this level have weakened recently.

The Swiss bank cites the Bank of Japan’s reluctance to raise interest rates and a lack of significant pressure from the United States on Japanese authorities to strengthen the yen as key factors preventing convergence to fair value.

For the euro, UBS has marginally lowered its EUR/USD fair value estimate to 1.1340, placing it slightly below the current spot price. This contrasts with the unadjusted OECD purchasing power parity (PPP) estimate, which stands well above the spot at 1.51.

UBS forecasts EUR/USD to reach 1.14 by the end of 2026, roughly in line with its long-term fair value estimate, noting that previous arguments for a valuation overshoot—such as European fiscal stimulus or increased demand by European investors to FX hedge their U.S. asset holdings—have largely faded recently.