FXStreet (Guatemala) – Analysts at TD Securities explained that the JPY looks undervalued on several key measures.
Key Quotes:
“In addition to the change in official tone, several factors have hastened our move to the sidelines.”
“From a long -term fundamental perspective, Kuroda struck a chord with his observations about the JPY’s real effective exchange rate (REER) value. As of April, when the latest data is available from the BIS, Japan’s REER was plumbing lows not seen since the early 1980s. The index has fallen 29.9% from its latest peak in January 2012 and is now nearly 20% below its post -Bretton Woods (from 1973) average. Only Sweden has a ‘cheaper’ currency among G10 counterparts on this basis, with the SEK 23.2% below its long – term average.”
“The further depreciation of the JPY on a trade – weighted basis since the end of April suggests that Japan’s REER has weakened further once data becomes available. The scale of the JPY’s undervaluation runs deeper and more broadly, however.”
“According to the OECD’s Purchasing Power Parity (PPP) calculations, the long -term fair value for USD.JPY is 104.13. At current levels, we are about 19% above that threshold. Using an alternative measure, the Fundamental Equilibrium Exchange Rate (FEER) as calculated by the Peterson Institute for International Economics, we see a similar result. Fair value on that basis is 107.00, putting current spot 15.6% above this mark. Separately, each of these valuation metrics points to a cheap JPY, but not one that has reached an extreme degree of undervaluation.”
“When taken together, however, the currency looks considerably undervalued when compared to its G10 peers. Indeed, the JPY is the only major currency that is seriously undervalued vs the USD on both relative price (PPP, REER) and Balance of Payments (FEER) metrics.”
(Market News Provided by FXstreet)