Japan Much Less Risky Than Europe From a Currency Perspective

June 25, 2015
By Bryce Coward, CFA in Economy, Markets

Asset allocation decisions are best not made in a vacuum and thus a major consideration when investing internationally is the currency risk one is willing to accept (assuming unhedged positions). In today’s world of zero interest rates, the dominant factor in currency movements seems to be the relative size and rate of change in QE programs between central banks. In this context when we see the high probability of further monetary easing by the ECB and compare that to the somewhat lower probability of a significant expansion of QE in Japan, we take note. We also note that the yen has already fallen significantly since it began QE in 2012 and that has left the yen much more undervalued than the euro from a purchasing power parity perspective (charts 1 & 2). From this perspective we see much less risk of a further devaluation in Japan than we do in Europe. After all, the yen is more than two standard deviations undervalued relative to the USD while the euro is less than one standard deviation undervalued by this metric.

Image 1

Image 2

Print Friendly, PDF & Email