Bets on a stronger yen have become more entrenched amid attractive valuations of domestic assets, the prospect of further interest rate hikes and an improving Japanese economy, BCA Research said.
The yen has staged a stunning recovery over the past two months, as hawkish Bank of Japan policy, a weaker dollar and a pullback in the carry trade pushed the currency to its highest levels in 2024. The pair had fallen to a low of 139 yen in recent weeks.
The yen was a “high-conviction” buy, and interest rates and global economic conditions were likely to favor the currency in the coming months, BCA Research said in a recent note.
The US Federal Reserve expects the Bank of Japan to cut interest rates this week. But “maintaining easy monetary policy” presents an opportunity to accumulate more yen, while an unexpected rate hike is expected to strengthen the currency further.
The research firm said Japan’s economy remained resilient, with domestic wage increases helping to stimulate private consumption.
With the US Federal Reserve beginning an easing cycle, and the Bank of Japan likely to raise interest rates further, the Fed sees interest rate differentials still moving in favour of the yen in the long run – especially if the global economy enters a recession.
The Fed expects Japan’s inflation rate to rise further in the coming months, in line with the Bank of Japan’s forecast and giving the central bank more room to raise interest rates. The central bank has raised rates twice so far this year, ending years of loose monetary policy amid expectations of stronger private consumption and inflation.
While the Bank of Japan is expected to keep interest rates unchanged in the near term, especially with the impending change in leadership in the Japanese government, it is expected to continue raising interest rates through the end of 2024 and into 2025. The Fed said that raising interest rates “will not hurt Japan.”
But BCA was less enthusiastic about Japanese stocks, rating them “structurally neutral.” The firm cited the strength of the yen as a headwind, and saw no immediate positive developments in ongoing corporate governance and structural reforms.