{"text":[[{"start":8.06,"text":"As Japan’s government battles to support the yen, analysts are turning to trade models, interest-rate differentials and even the price of katsu curry to figure out just how undervalued the currency is."}],[{"start":19.92,"text":"The vast majority of these long-term metrics, as well as a comparison with the recent past, suggest the yen looks cheap. But unfortunately for policymakers in Tokyo and Washington, who last month staged a historic joint intervention to prop up the currency, investors do not expect a swift rebound."}],[{"start":37.26,"text":"Many expect the yen to fall further amid worries over Japan’s enormous debt load and lingering doubts about its economy’s ability to accelerate out of its decades of low growth and inflation."}],[{"start":48.02,"text":"Too many investors felt that if Japan’s “debt situation is unsustainable . . . higher rates or yields make things worse, and so won’t stabilise the currency at all”, said Kit Juckes, chief FX strategist at Société Générale. “They need more growth.”"}],[{"start":62.84,"text":"The yen has already given up roughly half the gains it made following the recent US-Japan efforts to strengthen it. Having appreciated sharply from a 40-year low of around ¥164 to the dollar to almost ¥155, it has weakened again to around ¥159."}],[{"start":75.3,"text":"That is far weaker than the level of around ¥110 where it traded in the half decade before the Covid-19 pandemic. It caps a period of losses that has come in spite of Japan’s emergence from deflation and tentative interest rate rises by its central bank."}],[{"start":null,"text":"
"}],[{"start":94.62,"text":"The effects of the intervention have proved fleeting despite hints of faster rate rises from the Bank of Japan, underscoring just how negative market sentiment has become about the yen — one of the world’s most heavily traded currencies and one that typically behaves as a haven in global FX markets, rising in times of stress."}],[{"start":95.12,"text":"So what is the yen’s “fair value”?"}],[{"start":112.3,"text":"The OECD’s purchasing power parity measure, which essentially asks what exchange rate would make a basket of goods and services cost the same in Japan and abroad, suggests it should be much stronger at around ¥97 to the dollar. The Big Mac Index, a simpler alternative that swaps the basket for a single burger, has the yen at similarly depressed levels."}],[{"start":133.94,"text":"“The yen is dirt cheap on any PPP model,” said Juckes. “It doesn’t matter which measure of fundamental fair value you use, the yen is undervalued.”"}],[{"start":142.88,"text":"Geoff Yu, a strategist at Bank of New York Mellon, has come up with an alternative Katsu Curry Index, showing the relative value of the yen through a comparison of the pork dish across countries. According to Yu, one dollar should buy something closer to ¥62 on this admittedly simplistic measure, given that a Katsu curry costs ¥960 in Japan, not including sales tax, and $15 or so in the US."}],[{"start":null,"text":""}],[{"start":167.54,"text":"Such measures are popular with economists but tend to have little sway in currency markets — unfortunately for Prime Minister Sanae Takaichi’s government, which is anxious to reverse a yen slump that has pushed up the price of imports such as food and energy, adding to inflationary pressures."}],[{"start":183.06,"text":"Instead, traders tend to focus on differentials in interest rates, which are typically the biggest driver of FX market action."}],[{"start":190.46,"text":"Japan’s low borrowing costs relative to the US — and to other big economies such as the Eurozone — go some way to explaining the yen’s weakness, but they also suggest it is overdone. The gap between American and Japanese two-year borrowing costs has roughly halved over the past three years, a period in which the yen has fallen further against the dollar."}],[{"start":209.38,"text":"Nomura’s analysts suggest that the yen is 5.5 per cent undervalued based on the three-month US-Japan nominal interest-rate differential, 10.1 per cent on the two-year, 12.5 per cent on the five-year and 14.5 per cent on the 10-year differential."}],[{"start":null,"text":""}],[{"start":225.1,"text":"The same is true for inflation-adjusted exchange rates, looking at the yen in the context of decades-long averages. The Bank for International Settlements puts it at near-record lows on this view, while HSBC’s related measure says the dollar is currently “overvalued” by 12.5 to 42.6 per cent versus the yen."}],[{"start":243.9,"text":"Some officials in Tokyo say such broken correlations support one argument in favour of intervention — the desire not to target a particular level but to stop a “disorderly” slide in the yen."}],[{"start":256.34,"text":"Favourable fundamentals should help the currency strengthen, according to some analysts. “The market can’t price the yen so far away from fundamentals for a long time,” said Michael Metcalfe, global head of macro strategy at State Street."}],[{"start":271.06,"text":"But judging by speculative bets against the Japanese currency in futures markets, many investors are more sceptical that it is poised to rebound."}],[{"start":279.86,"text":"Traders say the yen’s deep discount, as implied by these measures, can be explained by worries over long-run inflation and fears that higher interest rates, rather than supporting the currency, could intensify concerns about a country whose gross sovereign debt is around 200 per cent of GDP."}],[{"start":295.18,"text":"The yen is “less cheap if you plug in relative interest rates, also less cheap if you also plug in debt to GDP and debt sustainability . . . and so on,” said SocGen’s Juckes."}],[{"start":307.08,"text":"That view chimes more with investment bank models that aim to value the yen in the short term by taking into account more market and capital flow factors, rather than estimate its long-term equilibrium."}],[{"start":null,"text":""}],[{"start":317.38,"text":"HSBC’s short-term model, based on historical one-month correlations, has fair value very close to the current spot price, while Morgan Stanley, taking into account global risk sentiment, suggests it could weaken towards ¥165 to ¥167 before gaining again if US rates fall."}],[{"start":335.6,"text":"To sustainably turn the tide on the yen’s decline, the government could do more to convince the market its plans are fiscally sustainable, analysts say. The BoJ could also exceed current market expectations with bigger rate rises that would convince Japanese companies and households — who are big holders of overseas assets — to bring their money home, they add."}],[{"start":355.46,"text":"That could help dent a large so-called carry trade — where investors borrow in yen at low interest rates to fund investments elsewhere — that has weighed down the currency."}],[{"start":364.12,"text":"But many are sceptical about the BoJ’s willingness to do so, given worries about sending a still-recovering, ageing economy back into deflation."}],[{"start":371.14,"text":"“We’ve seen these interventions over the past three or four years, and all of them worked in the short term,” said Shoki Omori, a fixed-income strategist at Deutsche Bank in Tokyo. “But they didn’t really incentivise corporates, hedge funds or the broader financial community to repatriate funds or move back into other currency carry trades . . . The BoJ . . . has to find a way to convince the market that it can be more aggressive.”"}],[{"start":397.28,"text":""}]],"url":"https://audio.ftcn.net.cn/album/a_1786692297_8682.mp3"}