Investing.com -- The yen's slide to near 40-year lows reflects the Bank of Japan's inflationary monetary policy rather than concerns about Japan's public finances, BCA Research said in a report.
BCA expects the yen and Japanese government bonds to remain under pressure through the end of 2026, though it said investors should prepare to begin buying the deeply undervalued currency this winter.
The firm argued that traditional interest-rate differentials no longer explain the yen's weakness. Measures of inflation expectations and the relative steepness of Japan's yield curve provide a stronger explanation for recent moves in USD/JPY and EUR/JPY.
Japan's real policy rate stands at minus 0.75%, which BCA described as highly accommodative amid signs that the economy is overheating. Annual wage negotiations have produced increases above 5% for three consecutive years, and credit growth reached 5.7% in June, its fastest pace in more than 30 years outside the pandemic.
BCA expects Japan's headline inflation to reach 2.7% by June 2027, with core inflation rising to 3.1%. Such an increase could eventually force the BoJ to adopt a more hawkish position, supporting the yen and flattening the Japanese yield curve.
Low currency and bond-market volatility has also encouraged carry trades funded with yen, adding to selling pressure. Heavy speculative short positioning creates a growing risk of a sharp reversal if volatility rises or authorities intervene.
BCA recommended remaining underweight Japanese government bonds through year-end and beginning to accumulate yen during the winter. It also replaced a short USD/JPY position, closed at a 1.4% loss, with a short CHF/JPY trade.
The firm moved Japanese banks to neutral. Rising yields have supported bank profitability, but a future BoJ shift could flatten the yield curve and reduce lending margins.
BCA said Japan's high government debt does not represent an immediate fiscal crisis, citing the country's current-account surplus, large foreign-asset position and falling net debt-to-GDP ratio.
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