Asian Currencies Face Undervaluation and Market Volatility

The Economist's Big Mac index, a measure of currency valuation, is sending a warning signal for several Asian currencies, indicating they are undervalued. The article discusses the implications of this undervaluation and references the historical context of currency coordination among major economies, such as the 1987 Louvre Accord. It also touches upon the current weakness of the yen and the potential impact of Japan's significant foreign portfolio on global markets if it were to be sold off.

The article discusses Japan's significant foreign investment portfolio, valued at $6 trillion, and the potential global market implications if Japanese investors were to suddenly withdraw their funds. The portfolio has doubled in the past 20 years due to low domestic returns caused by rock-bottom interest rates and a weak yen. Half of the investments are in American assets, and another fifth are in the Cayman Islands, primarily as a conduit for further American investments. The article explores the potential consequences of a sudden sell-off, highlighting the far-reaching effects on global markets.

The article discusses the persistent weakness of the Japanese yen despite the Bank of Japan's efforts to raise interest rates. The yen has remained limp, with some speculating that Japan and America may consider a joint intervention to prop it up. The article highlights Japan's abnormal economy, characterized by low growth, high debt, and low interest rates. It also notes that the yen's weakness is not an isolated issue, as other currencies in Asia also appear undervalued.