Investing.com — BCA Research said bets on a stronger Japanese yen were becoming increasingly entrenched amid attractive local asset valuations, the prospect of more rate hikes and an improving Japanese economy.
The yen has had a fantastic recovery over the past two months as an hawkish Bank of Japan, a weaker dollar and a declining carry trade pushed the currency to 2024 highs. The pair had fallen to 139 yen in recent weeks.
BCA Research said in a recent note that the yen was a “high-conviction” buy, and that interest rates and global economic conditions were likely to favor the currency in the coming months.
BCA expects the BOJ this week. But a ‘softening stance’ is an opportunity to accumulate more yen, while an unexpected rate hike will further boost the currency.
The research firm said Japan’s economy remained resilient, with increases in local wages helping to boost private consumption.
With the Federal Reserve entering an easing cycle and the BOJ likely to raise rates further, BCA expects long-term interest rate differentials to still move in favor of the yen, especially if the global economy enters a recession.
BCA expects Japanese inflation to rise further in the coming months, which is in line with the BOJ’s forecasts and gives the central bank more room to raise interest rates. The central bank has raised interest rates twice so far this year, ending years of accommodative monetary policy on expectations of a rebound in private consumption and inflation.
While the BOJ is expected to leave rates unchanged in the near term, especially with a looming leadership change in the Japanese government, it is still expected to continue raising rates through the end of 2024 and into 2025. BCA said interest rate hikes will “not hurt Japan.”
However, BCA was less enthusiastic about Japanese shares and rated them as ‘structurally neutral’. The company cited the strength of the yen as a headwind and saw no immediate positive developments in ongoing corporate governance and structural reforms.
