BNY’s Geoff Yu highlights that the Japanese Yen (JPY) remains significantly undervalued on a Real Effective Exchange Rate (REER) basis even as Euro (EUR) and US Dollar (USD) valuations have converged. He notes United States (US) –Japan coordination on exchange rates is already underway and argues Europe should be more proactive, as sustained JPY weakness poses greater competitive risks for Eurozone exporters than for the United States.

JPY undervaluation and European risks

"Based on the Bank for International Settlements’ (BIS) Real Effective Exchange Rate (REER) indices, measured by their change over the last five years, the dollar and euro have fully converged in valuation over the past six months. A range breakout would require a significant structural catalyst – the technology drivers behind “U.S. exceptionalism” or the “European strategic autonomy” theme on defense."

"Japan has had no such lift, but there is a difference between “lack of appreciation” and the kind of secular depreciation currently witnessed."

"The risks of sustained and significant JPY undervaluation are much more of an issue for Europe than the U.S. due to greater export competition, though that has been eroded over time, especially in the automotive sector, where China has significantly disrupted global markets. While the U.S. tariffs issue has faded somewhat, it remains a long-term concern and could yet force REER appreciation."

"U.S. Treasury Secretary Scott Bessent’s trip to Tokyo was accompanied by another sharp, brief drop in USD/JPY. The market will look to intervention figures at month end to gauge the Japanese Ministry of Finance’s resolve in intervening in FX markets, but so far it has very little to show for it."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)