Yen and yang

Sep 28th 2006 | HONG KONG

From The Economist print edition

China-bashers may soon take aim at the yen, the world's most mispriced currency

WHICH country has the world's most undervalued currency? Most people would answer China. Yet by many measures the Japanese yen is now cheaper than the Chinese yuan. It cannot be long before America and Europe put Japan in the dock, alongside China, and accuse it of keeping its currency unfairly low.

Until this year the yen's weakness was easy to explain: since 2001 the Bank of Japan (BoJ) had been printing loads of money in order to defeat deflation. An increased supply of yen relative to that of other currencies pushed down its price. But the yen's softness this year is a puzzle. Since the BoJ abandoned “quantitative easing” in March, Japan's monetary base has withered. Deflation has gone away, and in July the BoJ raised interest rates, which had been stuck at zero for five years. Furthermore, Japan had a whopping current-account surplus of $165 billion in the year to July (the latest figure for China, for 2005, is only $161 billion, although it is expected to rise in 2006). In many respects, the yen should be climbing.

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