By Faiza Kamal
After a tough month for the Japanese yen, analysts at BCA Research believe the currency is poised for a significant comeback that could stretch over several years.
On Thursday morning, the USD/JPY pair dipped by 0.2%, trading at ¥150.49, after briefly touching ¥150.91—its lowest point since late March. Despite this weakness, BCA Research is turning bullish on the yen, pointing to three key factors they believe could spark a long-term rally: undervalued pricing, favorable external balances, and a shifting policy landscape in Japan.
Valuation Signals Turn Positive
BCA’s long-range valuation models suggest that the yen is deeply undervalued, especially relative to the U.S. dollar. Despite this year’s modest 4.9% appreciation of the yen—even after the Bank of Japan (BoJ) implemented a rare 25 basis-point rate hike—it hasn’t kept pace with broader dollar weakness. The U.S. Dollar Index has already dropped 8% this year.
Compare that to the euro, which has jumped 10.3% against the dollar, even though the European Central Bank (ECB) cut rates by 100 bps in 2025. The lag in yen performance boils down to one factor: real interest rates.
Japan’s Rates Are Set to Rise
Currently, Japan’s real interest rate sits at -1.74%, compared to 1.59% in the U.S. and -0.19% in the eurozone. This wide gap explains why investors have favored the euro over the yen in recent months, especially amid stronger economic prospects in Europe.
But BCA expects this dynamic to change. As Japanese inflation cools and the BoJ resists reversing its tightening, real rates in Japan will begin to rise. This shift, combined with compelling valuation support and strong current account surpluses, lays the groundwork for a meaningful appreciation of the yen against both the dollar and the euro.
Best Trades May Be Yen vs. Euro—For Now
Still, BCA warns that timing is critical. The U.S. dollar-yen pair continues to benefit from a positive carry trade, making short positions against it premature while the Federal Reserve remains on hold.
Instead, the firm suggests EUR/JPY may offer a cleaner and lower-risk play on yen strength in the current environment. With European growth momentum fading and the euro’s rate advantage diminishing, it could be the more strategic path for traders looking to position early for yen upside.
Once the Fed begins cutting rates, however, BCA believes that USD/JPY will present a more attractive opportunity for short-sellers.
