As the yen continues to weaken and the Bank of Japan postpones rate hikes, the gap between the IMF’s purchasing power parity and the market exchange rate is affecting how households and companies respond to prices.
The author, visiting Sapporo, notes that restaurants and accommodation feel inexpensive when converted into dollars. This reflects the yen’s depreciation, which has created price differences between Japan and the United States for the same products. Yen depreciation benefits exporters, but burdens Japanese households and industries that rely heavily on imports. The gap between the IMF’s purchasing power parity (PPP) and the actual exchange rate indicates the discrepancy between the yen’s “underlying value” and its market price.
Under PPP, the yen is worth approximately ¥93 to the dollar, but the market rate has remained in the ¥150s to around ¥160, implying that the yen is valued approximately 40% below its underlying value. In Japan, which relies on imports for much of its energy and food, this gap generates high import prices and pushes up the burden on households. Exporters may retain a price advantage overseas, while importers are likely to face higher costs.
The Bank of Japan’s monetary policy response has been criticized as delayed and insufficient. The BOJ’s policy rate has remained at around 1.25% and was left unchanged at its meeting at the end of October. Some believe that an increase in carry-trade activity exploiting interest-rate differentials would further accelerate yen depreciation. Although the BOJ recognizes that inflation has reached 2%, it is viewed as remaining cautious about deciding whether to raise rates.
Compared with the experience of periods of yen appreciation, Japan is currently facing continued “costly yen depreciation.” During past periods of yen appreciation, efforts were made to correct the yen’s strength, and the Japanese economy moved toward overcoming deflation. Today, however, monetary tightening to address inflation is the focus. Depending on future policy measures and exchange-rate movements, the balance between price stability and the burden on households may be affected.