Joined: 17 Jul 2006
|Posted: Sun Oct 01, 2006 11:45 pm Post subject: Japanese Yen Exchange Rate Undervalued
|October 1, 2006
Quote from the Economist about Japanese Yen Exchange Rate:
Until this year the yen's weakness was easy to explain: since 2001 the Bank of Japan (BoJ) had been printing loads of money in order to defeat deflation. An increased supply of yen relative to that of other currencies pushed down its price. But the yen's softness this year is a puzzle. Since the BoJ abandoned “quantitative easing” in March, Japan's monetary base has withered. Deflation has gone away, and in July the BoJ raised interest rates, which had been stuck at zero for five years. Furthermore, Japan had a whopping current-account surplus of $165 billion in the year to July (the latest figure for China, for 2005, is only $161 billion, although it is expected to rise in 2006). In many respects, the yen should be climbing.
Instead, since March it has fallen slightly against the dollar and by as much as 8% against the euro, which fetched a record ¥150 earlier in September, before edging back up a bit. Since mid-2001 the yen has fallen by around 35% against the euro, while against the weaker dollar it is little changed. Japanese exporters have also gained competitiveness relative to South Korea, where the won has risen strongly against the dollar during the past year.
Not only is the yen cheap in nominal terms, but many years of falling prices in Japan have made it even more competitive. Its real trade-weighted value fell this month to its lowest since 1982 (see chart). The latest update of The Economist's Big Mac index (see article) showed that the yen was by far the most undervalued of the developed world's currencies—ie, hamburgers are cheapest in Tokyo. Using a more sophisticated model, Stephen Jen, of Morgan Stanley, reckons that the yen is 12% undervalued against the dollar, whereas the yuan is only 7% too weak. Against the euro, the yen is almost 30% below its fair value.
If the yen is the most mispriced currency on the planet, why are Japan's trade partners not complaining loudly, as they do about the yuan? Some European finance ministers and central bankers, including Jean-Claude Trichet, the president of the European Central Bank, have started to argue recently that the yen is not bearing its fair share of the dollar's decline. But a big difference between Japan and China is that the yen floats freely and is not being held down by currency intervention as it was back in 2003-04.
Such a cheap currency might seem a good investment. But to predict where the yen is heading, you have to understand why it is so weak today. One reason is that at 0.25%, Japanese interest rates are still unattractive. And inflation has gone up by more than the quarter-point rise in Japanese interest rates, leaving real rates close to zero and even lower than last year.
My comment: Japanese Yen will not stay this undervalued at 118.06 to 1 US Dollar. It would be a good time to invest in Japanese currency and related equities.