The currency war “truce” at the G20 meeting in February of this year has effectively placed political pressure on Japan to refrain from further depreciation of the yen. We investigate whether this has frozen USDJPY at its “fair value”. Although a naïve reading of PPP figures suggests that the outcome is reasonable, adjustment for productivity differentials suggests that the yen is now heavily overvalued versus the dollar, with attendant negative consequences for the Japanese economy.
• A combination of lower oil prices and the weak Yen have both helped restore the trade balance to health but a naïve scenario analysis suggests the trade balance is still subject to uncertainty from energy price and exchange rate dynamics.
• Worries may eventually shift from energy issues to saving rates – a shift in corporate saving behaviour, which has in the past shielded Japan’s external balance from declining household saving rates could have repercussions for the current account.