The Japanese Yen Is Still 80% Over-Valued

Tyler Durden's picture

In the 40 years or so since the end of the Bretton Woods system, we have seen competitive devaluations occur again and again. However as SocGen notes, it appears Japan just keeps coming out on the losing side. Based on Real Effective Exchange Rates (REER), Japan's currency is 80% stronger now than in 1971 while the US (and South Korea interestingly) are about 40% weaker.


The Euro has remained in a relatively stable band as the rest of the world has de- or re-valued itself. The 20% or so drop in the JPY so far under Abe's guidance appears a blip on the REER radar screen compared to its peers but, at the other end of the spectrum, SocGen suggests the USD is notably under-valued on a Purchasing Power Parity (PPP) basis - even as 'the strong dollar policy' remains verbally in tact.


So with the G-7 and G-20 appearing to bless the currency war progression (happy to let Japan get a few hundred pips knowing very well that it was japan's FX sacrifice - facilitated by its historic current account and trade surplus, both since ended - in the past 40 years that allowed all other developed countries to crush their currencies with impunity on a relative basis), we suspect it will be Bernanke or Draghi that will need to act next - or their precious equity markets may just hit an FX-translated wall of worry.


Charts: SocGen

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Mr. Fix's picture

"'the strong dollar policy'" Ha Ha Ha!!!

Smegley Wanxalot's picture

more like a Strong Dickya Policy

torabora's picture

Nothing is overvalued when people pay for it. The problem with Efficent Market Theory is when people are able to borrow to buy. Then the object of affections price becomes perverse.

Bam_Man's picture

As the fiat currency of a hopelessly over-indebted government, I would argue that the Yen is 100% over valued.

q99x2's picture

Keep the foreign money coming. Get your houses. Get em while their hot.

rehypothecator's picture

How is the USD supposed to rise up away from zero, on a chart against an axis that is labeled, among other things, (USD=0)? 

Peter Pan's picture

With another Fukushima incident or Fukushima taking a turn for the worse, the case may be that the yen is 100% overvalued.

Then again, when the Eureka moment dawns on the masses everywhere about the fragility of the system and the impossibility of things getting better, then we may well see all currencies being seen for what they are.......massively overly valued pieces of paper.

bmusic's picture

2nd place in the race to debase isn't too bad!

Orly's picture

In the mid-1980's, the Japanese economy was red-hot on a tear.  They were going to take over the world with their robotic business models and super-efficiency.  It made sense for the yen to strengthen at that time.

But a decade later, it was getting clear that the efficiencies created in Japan were being exported to other Asian economies, yet the yen still strengthened on the backs of Japan being the gateway to Asia, with open markets, high-finance and a population far more sophisticated, business-wise, than their counterparts in Korea, China and Vietnam.

The technology booms of the 2000's left the Japanese again in a relatively strong position, as they were the only ones able to design the far-reaching technology tools that we take for granted today.  But the staples of their economy- automobiles and retail electronics- fell by the wayside as companies like Sony and Panasonic stopped innovating.  Toyota has had many recalls and the well-known quality of their cars has slipped dramatically.

When the financial crisis hit, Japanese yen and Japanese government bonds became a safe-haven for investors who were waiting for the other shoe to drop.  This increased the value of their currency to unprecedented levels.  Their hurting export economy took it further on the chin and began to crumble, until their fabled trade surplusses are now trade deficits.

All this is to say that there was a perfect storm for the Japanese to go from owning 30 Rock and Pebble Beach to now.  There were cetainly managerial mis-steps, hubris, perhaps.  But it is clear from Soc-Gen that the West was able to make a ton of money off the citizens of Japan as their currency remained relatively strong, especially against the US Dollar.

It should be clear to the Western nations by now that allowing that situation to continue was a serious mistake.  The best ally to Western influence in the Pacific is Japan, with Australia running in second-place.  There should be some sympathy for the plight of the Japanese economy and not whining about the exchange-rate.

It makes no sense to me that any Western nation would sincerely complain, unless it were to capture a few more union votes in the short-term, while leaving the island nation flailing against a collapsing system of what has come to be called Keynesianism.  All efforts should be taken to come to their aid; an Asian Marshall Plan, so to speak.  We did it for the Europeans after the war and now is the time for all good nations to put aside petty bickering and come to the aid of our Ally who has taught us so much about modern production.


Panafrican Funktron Robot's picture

Or, we could just let their currency collapse and see what happens.  Crazy thought, they might end up being better off in the long run.  

I take it you're long JPY Orly?

Orly's picture

Not right now. Waiting for the USDJPY pair to close the gap on the Weekly open, then see what happens.

The pair should bounce off the weekly pivot at ~93.4. If it doesn't bounce, then there could be another good-sized wave down.  I would expect a risk-on environment, which would send the yen crosses higher but, you never know.


hardcleareye's picture

Orly, Not a bad post until your last paragraph...

"an Asian Marshall Plan, so to speak.  We did it for the Europeans after the war and now is the time for all good nations to put aside petty bickering and come to the aid of our Ally who has taught us so much about modern production."


Hint, Think World Bank and the IMF..........

OpenThePodBayDoorHAL's picture

I think the Japanese pulled off the best trick of all: they kept their society intact. While others were racing to allow immigration in and export their industrial bases to low-wage countries, Japan kept immigrants out, kept employment high, and kept their industrial assets at home.

So now Europe is screwed with non-integrated non-homogenous high birth rate immigrant populations straining their welfare states, and all the low and mid-wage jobs gone. US too. Obomba's vision of Americans earning $9 hour assembling TV sets, really? That's where we want to head?

Jap's problem is energy...and if the pool at Reactor #4 gets shaky. But that's kinda like the "buy Citibank" trade at $4 in 2009: it's either that, or buy canned food and ammo. If the pool goes we're all dead anyway.

Bunga Bunga's picture

The Japanese pensioners will feel the weak Yen soon. Long Seppuku

marathonman's picture

The funeral services is the only growth business in Japan?

GFORCE's picture

The dollar will strenghten over the next few years and there's nothing Bernanke will be able to do about it!

BlackVoid's picture

I fail to see how a snapshot at 1971 is somehow relevant in the valuation of currencies. It is not.

If you believe this, then go long USD.

verum quod lies's picture

Exactly, and it presumes that in 1971 exchange rates were exactly correct and the new exchange rate regime/system is exactly like that which was previous to it (i.e., the current all fiat all the time vs. a weakened gold standard ala Breton Woods II). Really?

chump666's picture

SoGen don't stress it, the YEN is still short, you'll get some you greedy French bank.

Go rogue trade again, make it interesting.