Whenever commentators note how weak Japan’s currency has been in recent years, they tend to refer to the yen’s fall against the dollar to the lowest level since 2002. But a wider measure yields an even more eye-catching chart.
The real effective exchange rate (REER) measures the yen’s progress against a basket of trading partners’ currencies, adjusted for inflation. The REER takes into account changes in price levels as well as nominal currency levels, and thus reflects what you can actually buy.
Judging by the REER, the yen hasn’t been this weak since early 1973, says Robert Sierra of Halkin Services. It may now strengthen, but even if it does, it needn’t become a headwind for Japan’s export-orientated stockmarket. Between 1985 and 1987, for instance, the yen doubled against the dollar, but so did the Topix index. The quickening recovery in bank lending “provides another reason to be positive on stocks”.