The yen conundrum - reviewing value in currency markets

Demography and government debt

The Japanese yen is trading at a five-year low and on competitive criteria it is extraordinarily cheap. This may be attractive for the long term, but for the short term caution is advised.

The joke has it that the US dollar will sustain its value because its principal competitors are so flawed: the EU is a museum, Japan is an old people's home and China is a prison. There is a grain of truth in these characterisations, but the US currency has plenty of challenges itself. Fashion plays a role in the factors that determine day-to-day reaction functions in the FX market. In the past the dominating factor has varied from relative inflation, relative growth of money supply, balance of trade and anticipation of central bank interventions. Today's dominant fashion is relative nom...