WHICH country has the world's most undervalued currency? Most
people would answer China. Yet by many measures the Japanese yen is
cheaper than the Chinese yuan. It cannot be long before America and
Europe put Japan in the dock, and accuse it of keeping its currency
unfairly low.
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 currenciesie, 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.
