The yen has suffered a difficult month, but BCA Research thinks the Japanese currency is primed for a multi-year rally.

At 08:30 ET (12:30 GMT), USD/JPY traded 0.2% lower at Y150.49, having earlier in the session climbed as high as Y150.91, the Japanese currency's lowest level since March 28.

However, BCA Research sees the potential for a sharp recovery, basing its bullish cyclical thesis for the yen rests on three pillars: valuations, balance of payments, and policy normalization.

The bank's long-term valuation models are unequivocal: the yen is attractively priced, especially versus the dollar.

This year, the U.S. Dollar Index has already slipped by 8%. Yet the Bank of Japan, the lone hawk among major developed-market central banks, raised rates by 25 bps in January, and the yen still gained only 4.9%.

By contrast, the ECB has cut by 100 bps in 2025, and the euro vaulted 10.3% against the dollar.

"The culprit is real policy rates. Japan's sit at a meager -1.74%, versus 1.59% in the U.S. and -0.19% in the eurozone," BCA Research said, in a note dated July 31.

"Add to that a sharp improvement in European growth expectations, and it is no surprise that capital has flowed into the common currency while the yen has lagged."

However, that configuration is about to flip. As Japanese inflation drifts lower and the BoJ resists easing, Japan's real rates will rise.

Coupled with compelling valuations and strong balance-of-payments dynamics, this shift should unleash a substantial yen rally against both the dollar and the euro.

Timing, however, is everything, the bank stated.

"Shorting USD/JPY now is ill-advised: the pair still enjoys a large positive carry, and the Fed remains on hold. EUR/JPY, by contrast, offers a far cheaper carry profile, and Europe's fading momentum makes it the cleaner expression of yen strength today," BCA Research said.

"Once the Fed starts cutting rates, the opportunity to sell USD/JPY will emerge."

Source: Investing.com