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We've detected you are on Internet Explorer. For the best Barrons.com experience, please update to a modern browser. CHROME SAFARI FIREFOX We've detected you are on Internet Explorer. For the best Barrons.com experience, please update to a modern browser.GoogleFirefox Search News & Quotes Barron's TopicsStock PicksMagazineDataAdvisorPenta100 Years Subscribe Now |Sign In Barrons The Yen Is Historically Undervalued. It’s Likely to Stay That Way. Next: Value Stocks Are Holding Up Better Than Growth in the Selloff. 6 Funds to Ride Out the Storm. * * * * Share This copy is for your personal, non-commercial use only. To order presentation-ready copies for distribution to your colleagues, clients or customers visit http://www.djreprints.com. https://www.barrons.com/articles/japanese-yen-value-51651847360 * Currencies * Other Voices THE YEN IS HISTORICALLY UNDERVALUED. IT’S LIKELY TO STAY THAT WAY. * * * * -------------------------------------------------------------------------------- COMMENTARY By Marc Chandler and Omkar Godbole Updated May 7, 2022 / Original May 6, 2022 * Order Reprints * Print Article BARRON'S NEWSLETTERS THE BARRON'S DAILY A morning briefing on what you need to know in the day ahead, including exclusive commentary from Barron's and MarketWatch writers. I would also like to receive updates and special offers from Dow Jones and affiliates. I can unsubscribe at any time. I agree to the Privacy Policy and Cookie Policy. Enter your Email SIGN UP You have been successfully subscribed to The Barron's Daily. Your first delivery will arrive within two days. Continue Reading Illustration by Laurent Duvoux Text size Your browser does not support the audio tag. Listen to article Length 6 minutes AD Loading advertisement... 00:00 / 05:41 1x This feature is powered by text-to-speech technology. Want to see it on more articles? Give your feedback below or email product@barrons.com. thumb-stroke-mediumthumb-stroke-medium About the authors: Marc Chandler is chief market strategist for Bannockburn Global Forex, a division of First Financial Bank. Omkar Godbole is an independent foreign-exchange writer. The Japanese yen THE YEN HAD ITS WORST DROP IN 20 YEARS. WHY IT COULD HELP JAPANESE STOCKS. Japan's central bank governor is keeping the yen weak, which gives a big boost to Japanese exporters. Continue reading has dropped like a rock. The market has become convinced that—arguably, after a late start—the Federal Reserve has begun the most aggressive tightening cycle seen in a generation. Meanwhile, the Bank of Japan has signaled its resolve to cap its 10-year bond yield at 0.25% indefinitely. The yen depreciated 6% against the U.S. dollar in April, pushing the dollar above JPY131 for the first time in two decades. The demand for dollars has been so intense that at one point, it rose for 13 consecutive trading days. According to the Organization for Economic Cooperation and Development’s purchasing-power parity measure, the yen is now more undervalued against the dollar than at any point in over 30 years. While the yen is historically undervalued, the forces driving it lower aren’t exhausted. The divergence between U.S. and Japanese monetary policy is stark. The U.S. is tightening monetary policy aggressively, while Japan sits with an open-spigot monetary policy. There is a long-held belief that the world’s third-largest economy is export-driven. Hence, Japanese policy makers should prefer a weak yen. But, at best, this belief is a distorted echo of the past. At worst, it may be a profound misunderstanding. Last year, Japan ran an average monthly trade deficit of JPY139 billion (approximately $1.2 billion) compared with an average monthly surplus of JPY32 billion in 2020. Japan’s exports are around 17.5% of its gross domestic product, higher than the U.S. at 12%. But other advanced economies export a much greater share. Canada and the U.K. export about a quarter of their GDP, while Germany exports 47%. And while Japan still runs a current-account surplus, it isn’t driven by trade. Some would argue that the yen’s depreciation would make Japanese goods cheaper in the international market, thereby lifting its exports. But Japanese businesses have responded to the chronic pressure to appreciate the yen by offshoring. That new dynamic helps explain a recent Reuters survey that found corporate Japan is worried that the falling yen would weaken consumption and capital investments. The rolling 24-month correlation between the yen’s weakness and the performance of the Nikkei has fallen to its lowest level since 2005. In addition to the yawning divergence in monetary policy, Japan is being hit with a terms of trade shock. Higher energy, commodities, and food prices boost imports faster than the weaker yen boost exports. Moreover, the J-curve theory suggests that trade deficits initially worsen with currency depreciation, since prices adjust faster than quantities. The expected delayed positive impact on exports could be elusive, as the ongoing global policy tightening will likely cause demand destruction. The yen’s depreciation, however, will boost the value of current-account components like investment-related flows (dividends, coupons), profits, licensing fees, and royalties. What’s next for the yen? The Russian invasion of Ukraine was understood in economic terms as a disruption of supply, foodstuffs, energy, and some metals. We saw appreciation in commodity prices and currencies thought to be linked to commodities, such as the Australian and Canadian dollars, the South African rand, and many currencies in Latin America. But China and its Covid strategy is producing another wave of disruption as large parts of its economy are locked down again. The net result has been a demand shock. The divergence of monetary policy looks to be more persistent. Underlying it are different inflation experiences. The U.S. consumer price index rose 8.5% in its most recent reading, while Japan’s is still below 2%. U.S. inflation may be near a peak, but it will remain elevated. Data for April show Tokyo’s core CPI rose 1.9% over last year. The government pushed through a deflationary cut to cellphone charges in 2021, but that change will drop out of the 12-month comparison. Nevertheless, Bank of Japan Governor Haruhiko Kuroda argues that the increase in inflation won’t be sustainable and that the economy still needs extraordinary monetary accommodation. Some think that if the BOJ were to jettison its yield-curve control, the yen would strengthen. But where would the yield go? The 30-year Japanese government bond yields less than 1.0%. The exchange rate is also more correlated to the U.S. 10-year Treasury than to the 10-year Japanese government bond. While the BOJ under Kuroda seems to embrace the benefits of a weak yen, the Ministry of Finance is more concerned. The rhetoric has gradually become stronger. First, the ministry expressed concern about the pace of depreciation. Then it threatened to take appropriate action if needed. The ministry is climbing an escalation ladder. However, the bar to actual material intervention seems high. The yen’s weakness reflects fundamentals, the International Monetary Fund’s Asian-Pacific department head said recently. Intervention also seems to work best when it signals an adjustment of underlying policies, but that wouldn’t be the case now. It’s also unclear that the U.S. would appreciate dollar sales when the Federal Reserve is reducing monetary accommodation. Of course, Japan doesn’t need U.S. permission, but its blessing wouldn’t be so bad. Guest commentaries like this one are written by authors outside the Barron’s and MarketWatch newsroom. They reflect the perspective and opinions of the authors. Submit commentary proposals and other feedback to ideas@barrons.com. -------------------------------------------------------------------------------- * Value Investing VALUE STOCKS ARE HOLDING UP BETTER THAN GROWTH IN THE SELLOFF. 6 FUNDS TO RIDE OUT THE STORM. * * * * -------------------------------------------------------------------------------- By Evie Liu Updated May 10, 2022 8:00 am ET / Original May 10, 2022 1:00 am ET * Order Reprints * Print Article GROWTH FUNDS HAVE BEEN DANGEROUS TERRAIN THIS YEAR. Jim Watson/AFP/Getty Images A bearish stock market has clobbered equity funds of all stripes in recent weeks, but it hasn’t hit value funds as hard as growth funds. The stock market continues to expand its losses from last week, with the S&P 500 tumbling 3.2% on Monday. Growth-oriented stocks—many of which are richly valued and bet on earnings in the future instead of today—are bleeding even more. The tech-heavy Nasdaq Composite tumbled 4.3% on Monday, and is already down more than 27% from its peak in November 2021. Investors... Subscribe or Sign In to continue reading -------------------------------------------------------------------------------- More from News Corp * Realtor.com Looking to buy your first home? You’ve come to the right place. * Wall Street Journal Former Time Warner CEO Don Logan Lists Alabama Fishing Estate for $8.499 Million * Realtor.com Here Are the Most Popular Cities for Homebuyers in 2022—and the Places People Can't Wait To Leave * Financial News London Why inflation emerged during the pandemic * Wall Street Journal Auto Maker Stellantis to Keep EV and Gas-Engine Operations as One, CFO Says Close THE YEN IS HISTORICALLY UNDERVALUED. IT’S LIKELY TO STAY THAT WAY. From To Message SEND An error has occurred, please try again later. Thank you This article has been sent to Privacy Notice Cookie Notice Do Not Sell My Personal Information Copyright Policy Data Policy Accessibility Your Ad Choices Subscriber Agreement & Terms of Use Barron's Archive Corporate Subscriptions Manage Notifications Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. Barron's Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit www.djreprints.com.