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Sometime in the mid-seventies, the Nobel prize-winning economist Simon Kuznets is believed* to have said that there were “four types of countries in the world: developed, underdeveloped, Argentina, and Japan”.

Surprisingly, not much has changed in the intervening years – both economies remain truly exceptional along a number of dimensions, with the results playing out in the foreign exchange markets. The Argentinian peso has fallen so low that politicians are – again – campaigning on (probably misguided) pledges to peg the currency to the dollar. And the Japanese yen has led the developed world in relative weakness since the pandemic.

The chart below, which shows the percentage change in nominal trade-weighted exchange rates since January 2019, illustrates the extent of this underperformance: 

(click legend to select individual currencies)

With the dollar-yen exchange rate moving almost inexorably toward the 150 mark, the Ministry of Finance is beginning to jawbone markets in earnest. Intervention is in the offing once again – with the potential to trigger a brief rally – and changes in the Bank of Japan’s policy settings could have an impact. But without deeper structural changes in the Japanese and global economies, these efforts seem doomed to fail in reversing the currency’s decline. 

Until global growth and rate differentials collapse (perhaps by early next year), the yen looks likely to remain very weak in relative terms – intervention efforts notwithstanding. 

*Although this quote has circulated through the economics profession ever since, and I can find no evidence he ever actually said it, it’s simply too powerful to avoid repeating : )

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