Japanese Yen Plunges to Near 40-Year Lows Amid Inflationary Monetary Policy

The Japanese yen has been on a downward spiral to near 40-year lows, and BCA Research attributes this decline not to concerns about Japan's public finances but rather its inflationary monetary policy.

BCA expects the yen and other currencies to remain under pressure through the end of 2026. However, it advises investors to prepare to buy the undervalued currency starting this winter.

The firm argues that traditional interest-rate differentials no longer explain the yen's weakness. Instead, measures of inflation expectations and Japan's yield curve provide a stronger explanation for recent moves in the Japanese economy.

Japan's real policy rate stands at minus 0.75%, which BCA describes 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 outside the pandemic.

BCA expects Japan's headline inflation to reach 2.7% by June 2027, with core inflation rising to 3.1%. This increase could eventually force the Bank of Japan (BoJ) to adopt a more hawkish position, supporting the yen and flattening the Japanese yield curve.