The increasing number of Japan’s trading partners who say Prime Minister Shinzo Abe’s campaign to drive the yen lower has gone too far are gaining ammunition from measures designed to assess the relative cost of goods.
The yen’s nominal rate of 90.40 per dollar today is 16 percent lower than the level that takes into account differences in consumer prices in Japan and the U.S., according to the Economist magazine’s Big Mac index. That’s the widest disparity since 2009 and makes the yen the most undervalued of any Group of 10 currency, according to the gauge, which measures worldwide prices of McDonald’s Corp. (MCD:US)’s signature burger.
Abe economic adviser Koichi Hamada said 100 per dollar is a “good level” for the yen amid rising criticism globally of the nation’s moves to support exporters. The prime minister isn’t likely to get any sympathy from Group of 20 finance ministers meeting next month in Russia, where a central banker warned of a “currency war” of competitive devaluation.
“Overseas governments will probably voice their objections to Japan relying upon a weaker yen for economic recovery,” Hiroshi Morikawa, an economist in Tokyo at the Institute for International Monetary Affairs, which conducts research for the government, said Jan. 23. “Developed nations seemingly shared the view that the yen was overvalued when it was at the 70 level, but such a view is likely to recede.”
Michael Meister, the parliamentary finance spokesman for German Chancellor Angela Merkel’s party, said this week that Japan risks retaliatory action by G-20 nations. European Central Bank governing council member Jens Weidmann warned this week against “politicizing” the yen exchange rate.
The Economist’s index uses the ubiquitous hamburger’s local price as a barometer of costs of labor and materials in countries worldwide. The price was $4.33 in the U.S., based on the latest survey, while the cost in yen in Japan was equivalent to $4.09. The theory of purchasing-power parity contends that undervalued currencies will appreciate over time to close the gap, and vice versa for overvalued currencies.
When the yen touched a 4 1/2-year low of 124.14 per dollar on June 22, 2007, it was 35 percent undervalued by the Big Mac index, the most among G-10 currencies. From that point, it surged 65 percent to a postwar record of 75.35 on Oct. 31, 2011.
At the end of 2011, the Mexican peso was undervalued by 44 percent against the dollar, the most among major currencies. Last year, it was the biggest gainer, rising 8.4 percent. Brazil’s real was 27 percent overvalued in December 2011, preceding a 9 percent slump in 2012.
The yen was the worst performer in the past three months among the 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Currency Indexes. It plunged about 13 percent during the period on speculation the Bank of Japan (8301) would accede to pressure from Abe to double its inflation target to 2 percent and pledge unlimited money printing.
BOJ Governor Masaaki Shirakawa, who’s due to step down in April, and his board came through on both requests at the end of a policy meeting on Jan. 22, though it delayed the extra easing till next year, spurring a three-day rally in the yen. Japan’s core inflation rate hasn’t been above 2 percent for more than a year since 1992 and has averaged zero over the past two decades.
Data today showed Japan is a long way from inflation of any kind. Consumer prices excluding fresh food fell 0.2 percent in December from a year earlier, the statistics bureau said in Tokyo today, marking the seventh decline in eight months.
The yen is on course for an 11th weekly drop, a record in Bloomberg data going back to 1971, and it touched 90.69 per dollar today, the weakest since June 22, 2010.
“Shirakawa has left room for the next BOJ chief to do more aggressive easing,” Daisuke Karakama, a market economist in Tokyo at Mizuho Corporate Bank Ltd., said in a Jan. 23 interview. “The dollar-yen pair has soared at an almost vertical angle since November, and this kind of gain is impossible to continue without a correction. Yen weakness hasn’t changed course.”
Abe is counting on a drop in the currency to bolster an economy that’s estimated to have shrunk for the three consecutive quarters through Dec. 31.
Hamada, a retired Yale University economics professor who advises Abe on monetary policy, said Jan. 18 that 100 per dollar is a “good level” and that chipmaker Elpida Memory Inc. went bankrupt because the BOJ didn’t expand its balance sheet fast enough to halt currency appreciation. Deputy Economy Minister Yasutoshi Nishimura yesterday echoed Hamada’s opinion on the 100 yen level.
Leaders from G-20 countries said in September 2009 that the members will undertake monetary policies “in the context of market-oriented exchange rates that reflect underlying economic fundamentals.” Finance chiefs and deputy central bank governors from G-20 nations will gather next month in Moscow.
Japan’s Finance Minister Taro Aso last month questioned whether the nations had stuck to their pledge to avoid competitive currency devaluations, saying “foreign countries have no right to lecture us.”
The yen appreciated almost 30 percent against the dollar from the start of the U.S. Federal Reserve’s first round of so- called quantitative easing in November 2008 until it reached the record in October 2011.
Elpida, Japan’s last maker of computer-memory chips, filed for bankruptcy four months later, citing the effect of the strong yen. Currency appreciation makes Japanese-made products costlier overseas, putting exporters at a disadvantage against foreign rivals such as South Korea’s Samsung Electronics Co.
Japan’s trading partners are starting to grumble that the yen has fallen too far. It tumbled 18 percent against the Korean won last year, the most on record going back to 1986. Bank of Korea Governor Kim Choong Soo said on Jan. 14 his nation needs an “active” response in case exchange-rate volatility rises.
Alexei Ulyukayev, the first deputy chairman of Russia’s central bank, said on Jan. 16 that leading economies are on the brink of a “currency war” to keep up with Japan. Fed Bank of St. Louis President James Bullard said this month that he was “a little disturbed” by Japan’s exchange-rate strategy.
Officials from Germany and Taiwan have also joined in the chorus of complaints this week about the yen’s drop.
“Currency policies tend to draw attention because major economies have little room left for further monetary easing,” Minori Uchida, the Tokyo head of global market research at the Bank of Tokyo-Mitsubishi UFJ Ltd., said in an interview on Jan. 24. “We’re likely to see more comments from officials on exchange rates, so there’ll be a tug-of-war between those remarks and expectations for a weaker yen.”
The yen will probably finish this year at 90 per dollar before depreciating to 94 next year, according to median estimates of analysts surveyed by Bloomberg. The currency has traded at an average of about 101 in the past decade.
Abe said this week that the government intends to correct an “excessively strong” yen and that his administration’s mission is to get back a strong economy.
Japan’s government and central bank are “committed to reflate the economy and directly or indirectly to weaken the yen,” Callum Henderson, the Singapore-based global head of currency research at Standard Chartered Plc, said on Bloomberg Television on Jan. 23. “There’s no question that this is a further aspect of the currency wars, but if that’s what it takes to reflate the Japanese economy, then that’s exactly what’s going to be done.”
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