Investing.com– BCA Research says bets on a stronger Japanese yen are becoming more justified amid attractive valuations for local assets, the prospect of further interest rate hikes and an improving economy in Japan.

The yen has seen a remarkable recovery over the past two months as a hawkish Bank of Japan, a weaker dollar and a retreating carry trade have pushed the currency towards 2024 highs. The pair has fallen as low as 139 yen in recent weeks.

BCA Research said in a recent note that the yen is a “high-conviction” buy and that interest rates and the global economic environment are likely to support the currency in the coming months.

The BCA expects the BOJ to do so this week. But the “dovish holding” is an opportunity to accumulate more yen, while the unexpected interest rate hike is expected to strengthen the currency further.

The research firm said the Japanese economy remained resilient, with a rise in local wages helping to boost private consumption.

With the Federal Reserve entering an easing cycle and the Bank of Japan likely to raise rates further, BCA predicts that interest rate differentials will continue to shift in the yen’s favor over the longer term—even more so if the global economy enters a recession.

The BCA expects inflation in Japan to rise further in the coming months, which is in line with the BOJ’s forecast and gives the central bank more room to raise interest rates. The central bank has raised rates twice this year, ending years of effortless monetary policy in anticipation of a pick-up in private consumption and inflation.

The BOJ is expected to keep interest rates on hold for the foreseeable future, especially given the upcoming change in the Japanese government, but is still expected to raise rates through the end of 2024 and into 2025. The BCA said the rate hike would “not harm Japan.”

On Japanese stocks, however, BCA was less enthusiastic, rating them “structurally neutral.” The firm cited the strength of the yen as a headwind and saw no immediate positive changes in ongoing corporate governance and structural reforms.