Nordea’s Helge J. Pedersen argues that the Japanese Yen appears significantly undervalued versus the Dollar on both OECD purchasing power parity estimates and The Economist’s Big Mac Index. Despite Japan’s strong trade and current account surpluses suggesting room for Yen appreciation, persistently low Japanese interest rates versus the US continue to weigh on JPY and limit sustained currency strength.

Yen undervaluation versus Dollar highlighted

“It is not every day that the US and Japan join forces in the currency market to strengthen the yen. But that is exactly what happened in late July, after the Japanese currency had approached its lowest level in nearly four decades. The intervention worked – but only briefly.”

“This is an analysis where economists traditionally look at the so-called purchasing power parity (PPP) exchange rate – the rate at which an identical basket of goods in Japan and the US would cost exactly the same. This is a rate that the OECD, among others, attempts to calculate on an annual basis, and the latest figures suggest that the yen is significantly undervalued.”

“And in this year’s edition, the message is very clear: Asian currencies, and the yen in particular, look cheap against the dollar. The weakening of the yen has in fact been so dramatic that a Big Mac in Japan is now markedly cheaper than in China, measured in dollars.”

“Since Japan runs a large trade surplus with the US and a considerable current account surplus more broadly, all of this points to strong competitiveness – and suggests that a strengthening of the currency should be well within reach.”

“And unless the interest rate gap narrows – for example through further monetary tightening by the Bank of Japan – this dynamic will persist, with ever-cheaper Japanese burgers as a consequence.”