Japanese Yen: Valuation risks and policy coordination – BNY

⦿ Executive Snapshot

• What: The Japanese Yen is significantly undervalued, with potential implications for global trade dynamics.
• Who: Geoff Yu from BNY, U.S. Treasury Secretary Scott Bessent, Bank for International Settlements (BIS).
• Why it matters: Sustained weakness in the JPY could create competitive disadvantages for Eurozone exporters, necessitating coordinated policy responses.

⦿ Key Developments

• The JPY remains undervalued on a Real Effective Exchange Rate (REER) basis, while the EUR and USD valuations have converged.
• U.S.-Japan coordination on exchange rates is currently in progress, highlighting the need for Europe to adopt a more proactive stance.
• Sustained JPY weakness poses greater competitive risks for Eurozone exporters compared to those in the United States.

⦿ Strategic Context

• Historically, the JPY has experienced a lack of appreciation compared to the USD and EUR, with recent trends indicating secular depreciation.
• The global market dynamics have shifted, particularly in the automotive sector, where competition from China has disrupted traditional export patterns.

⦿ Strategic Implications

• Immediate market consequences include potential currency intervention by the Japanese Ministry of Finance to stabilize the JPY.
• Long-term implications may involve shifts in export competitiveness for Europe, necessitating adaptations in policy and trade strategies.

⦿ Risks & Constraints

• Potential risks include regulatory responses to currency volatility and the effectiveness of intervention strategies by the Japanese government.
• Increased competition from China poses ongoing challenges to Japan's export sector and could affect currency valuations.

⦿ Watchlist / Forward Signals

• Market participants will look for intervention figures from the Japanese Ministry of Finance at month-end as indicators of their commitment to stabilize the JPY.
• Future developments in U.S.-Japan policy coordination and European responses will be crucial in assessing the impact of JPY valuation on global trade dynamics.