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Japanese Yen is very cheap, and there a lot of catalysts emerging

In recent posts, I have been showing that the BIS has the Japanese real exchange rates at 1970s lows.

But how cheap is this really? The Japanese have a saying, “genchi genbutsu” which sort of means “go and see for yourself”. I am a big fan of this approach. But I am not going to get on a plane to go to Japan even though I want to. But I can check out the menu of one of my favourite places to eat in Osaka - a restaurant called Isaribi - part of the Riki Maru group. ( Isaribi is a robatayaki place - and every dish is a flat 330 yen. Below is a screenshot of the seafood dishes on offer. The Japanese at the stop states everything is 330 Yen - and that the do not use any Chinese produce in their products (!). The bottom left picture is of ika no sugatayaki is amazing - and at 2 GBP or 2.50USD a dish seems too cheap.

But Japan has been cheap before, why buy Yen now? First of all the Japanese government has intervened in the currency market for the first time in 20 years, so its a sign that they (or perhaps the Americans) are getting uncomfortable with Yen weakness. More interestingly, BOJ Base Reserve Balances are shrinking for the first time in years. Reserves shrank in 2006, and Yen subsequently rallied form 120 to 75.

We have also begun to see Asia opening its borders. Japanese travel current account turned positive in 2015, but since Covid has been at 0. If travel in Asia resumes its previous trend, the cheapness of the Yen should be supported by a surge in tourists to Japan.

The real driver of this would be if China relaxes its zero covid policy. Hong Kong has begun to relax its covid policies, and as this is under the control of the mainland, it should give us some idea of what Chinese authorities would need to see in the mainland to relax policies. Hong Kong saw a spike in cases and deaths early in 2022, but then a much more shallow spike recently which has already turned lower.

When we look at China data, we can see some similarities and some differences. With a much larger population, Chinese cases still look low.

But both China and HK looked to have normalised their new cases to new death ratios. In early 2022, deaths were running at above 3% of new cases in both HK and China. Now those ratios look in line with other similar nations.

If Chinese restrictions are lifted it is hard not to see Chinese visitors flooding into Japan. During Covid, Japan has become much cheaper, falling back to the cheapest levels since 2015.

The big risk to buying Yen is a Chinese devaluation. Politically I don’t think that is likely, but it is the one risk to buying Yen here.

Capital Flows and Asset Markets
Russell Clark