Functions for the Market
Purchasing Power Shows Yen a Third Undervalued Against Dollar
By Simon Peisley
The yen is about a third weaker than it should be when its purchasing power is compared to the U.S.
dollar's.
Use the Bloomberg to show the rate change needed for it to come into line. To analyze the value of the yen with
regard to its purchasing power, type
"world currency ranker" into the command
line and choose that function from
autocomplete. The shortcut is { WCRS
<GO> }. Set 'Base' to 'USD', if it's not
already a default setting. Use the 'Basket'
dropdown and select 'Major Currencies'
and hit <GO>. Then click on the 'Purch, Power' button. Change the date range to 01/01/97 to 01/01/15 and hit
<GO>. This is an 18-year period that establishes the baseline figure for the analysis. There are four
purchasing power options to the left of the screen. 'PPP (Consumer)' uses the consumer price index
and 'PPP (Producer)' uses the producer price index. Both should be used to determine whether
a currency is over or undervalued. The default screen shows the yen spot rate when measured
against long-run 'Consumer PPP' is undervalued by 31.9 percent against the dollar. Clicking on 'PPP
(Producer)' shows the currency to be 31.6 percent undervalued.
To analyze the spread between the current
yen price and consumer PPP over the
past 30 years, click on 'Japanese Yen'
on the chart. Then change the 'Period' to
'30 years' using the dropdown. Click the
button in front of 'PPP Spot Spread'. The
date range may have defaulted back to
1982-2000 so change it again to 01/01/97
to 01/01/15 and hit <GO>. This report may not be modified or altered in any way. The BLOOMBERG PROFESSIONAL service and BLOOMBERG Data are owned and distributed locally by Bloomberg Finance LP (“BFLP”) and its subsidiaries
in all jurisdictions other than Argentina, Bermuda, China, India, Japan and Korea (the (“BFLP Countries”). BFLP is a wholly-owned subsidiary of Bloomberg LP (“BLP”). BLP provides BFLP with all the global marketing
and operational support and service for the Services and distributes the Services either directly or through a non-BFLP subsidiary in the BLP Countries. BFLP, BLP and their affiliates do not provide investment advice,
and nothing herein shall constitute an offer of financial instruments by BFLP, BLP or their affiliates.
Bloomberg ® 02/03/2016 09:44:09
1 Functions for the Market
Click back on the 'PPP (Consumer)' button in the left-hand panel. The top chart shows the historical
movement of the yen against consumer purchasing power. The lower chart shows the spread. This
demonstrates the propensity for the currency to revert to the consumer PPP average over time and
that to close the gap the currency will have to move from its current level to around 89 yen to the
dollar.
The last time the yen was this far away from PPP was in 1995 and made a subsequent move from 84
to 125 against the dollar in two years. This analysis can be repeated using producer purchasing power by clicking on the 'PPP (Producer)'
button on the right panel on the screen.
For more information: Yen Rises Above Tankan Forecast for First Time During Abenomics { NSN
O1C1OU6JTSE9<GO> } Currency Turmoil Hands Crown of Thorns to Euro and Rallying Yen { NSN
O1B4TT6K50Y3<GO> }
To contact the author of this { FFM<GO> } article:
Simon Peisley, FX market specialist at +61-2-9777-1264 or [email protected]
Functions for the Market stories are reported by Bloomberg LP sales-support, product-development,
programming and other employees and then edited by the News Department. To suggest ideas
or provide feedback, contact [email protected] or this story's editor: Stew Hawkins at [email protected] or +852-2977-6091.
This report may not be modified or altered in any way. The BLOOMBERG PROFESSIONAL service and BLOOMBERG Data are owned and distributed locally by Bloomberg Finance LP (“BFLP”) and its subsidiaries
in all jurisdictions other than Argentina, Bermuda, China, India, Japan and Korea (the (“BFLP Countries”). BFLP is a wholly-owned subsidiary of Bloomberg LP (“BLP”). BLP provides BFLP with all the global marketing
and operational support and service for the Services and distributes the Services either directly or through a non-BFLP subsidiary in the BLP Countries. BFLP, BLP and their affiliates do not provide investment advice,
and nothing herein shall constitute an offer of financial instruments by BFLP, BLP or their affiliates.
Bloomberg ® 02/03/2016 09:44:09
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