USD/JPY: extremely under-valued at current levels - BTMU

Analysts at Bank of Tokyo Mitsubishi explained that their fourth ranked currency is the yen, which raised eyebrows with us to be honest! 

Key Quotes:

"This is down primarily to three factors on the scorecard. Firstly, it is easy to forget that based on traditional measures of capacity, Japan has little spare capacity with the unemployment rate (3.0%) well below the 20-year average (4.3%) and unlike elsewhere wages in Japan are currently in line with the 20-year average growth rate.

"The problem of course is that the 20-year average wage growth rate is zero percent! But the yen scored worst on the inflation measure with actual inflation some 2.4ppts away from the BoJ’s target. Of course these measures are relative and while our scorecard indicates less scope for maintaining the current monetary stance than other central banks, the 20-year deflationary problem has certainly skewed JPY further up the scorecard than perhaps where it should be. 

Nonetheless, it does tally to a degree with the potential for the BoJ to abandon the zero percent 10-year JGB yield target, which would no doubt help drive the yen stronger, especially given our estimate of the yen being extremely under-valued at current USD/JPY levels."