72 Finance & economics The Economist February 26th 2022
mum wage by 50%), strong retail demand
and continuing increases in energy and
commodity prices.
Most problematic is Turkey’s insistence
on keeping interest rates low. After a series
of cuts last year, the central bank’s bench-
mark rate is 14%, a whopping 35 percentage
points below the rate of inflation. Down
the line, Turks may question the wisdom
of keeping their money in the banks when
the interest on their deposits, even those
protected from currency shocks, is so
much lower than inflation, says Selva De-
miralp, an economics professor at Istan-bul’s Koc University. They may instead de-
cide to spend on consumer durables or
property, further fuelling price growth.
Reining in inflation is hard enough
with orthodox monetary-policy settings.
(Ask Brazil, where inflation is into the dou-
ble digits despite a number of interest-rate
rises.) With Turkey’s, it is impossible. This
will not change soon. Obsessed with
growth and convinced, wrongly, that the
way to tackle inflation is by cutting rates,
Mr Erdogan has sworn to keep borrowing
cheap. “We cannot sacrifice the growth
rate,” acknowledges Cevdet Yilmaz, a rul-ing-party lawmaker.
This does not mean that hyperinflation
is on the cards. Price increases of the kind
Turkey expects to see over the coming
months tend to push down demand, says
Gizem Oztok Altinsac, chief economist at
Tusiad, the country’s biggest business as-
sociation. This creates a buffer preventing
inflation from reaching triple digits, she
says. But with persistent structural pro-
blems, and the central bank’s credibility
shattered,bringing it back down to the sin-
gle digits,oreven below 20%, will probably
take years.T
he lastshallbefirst,andthefirst,
last. An emerging theme in capital
markets is that securities that generated
bumper returns in the era of low in-
flation, sluggish demand and zero in-
terest rates—think American tech
stocks—are under pressure, while assets
that fared horribly in the 2010s (oil,
mining and bank stocks) are holding up
well. If it is cheap, inflation-proof and
formerly unloved, capital is now increas-
ingly drawn to it.
This brings us to the yen, the forgot-
ten currency of the least inflation-prone
big economy, Japan.
It once had a solid reputation as a
haven, like the Swiss franc or the Amer-
ican dollar. Whenever a storm blew up,
the yen rallied. But not recently. In the
volatile weeks since the start of 2022, the
yen has mostly moved sideways against
the dollar. Even Russia’s invasion of
Ukraine did not immediately change its
course. The yen is a cheap currency that
keeps on getting cheaper. Its cheapness
now looks like an obvious virtue.
Japan remains the world’s largest
creditor. Its net foreign assets—what its
residents own abroad minus what they
owe to foreigners—amount to around
$3.5trn, almost 70% of Japan’s annual
gdp. Some of those assets are fixed in-
vestments, such as factories and office
buildings. But a chunk is held in bank
deposits, and in shares and bonds, which
can be liquidated quickly.
In past periods of high stress, such as
during the global financial crisis of 2007-
09, capital was pulled back into Japan by
nervous investors. The upshot was an
appreciating yen. In some instances, the
effect was dramatic. In October 1998, as
the crisis surrounding ltcm, a busted
hedge fund, came to a head, the yen
appreciated from 136 to 112 against thedollarinamatterofdays.Itisrallies such
as this that gave the yen its safe-haven
reputation. When trouble struck, you
followed the Japanese money.
This has not worked so reliably lately.
An important change came with the re-
election of Abe Shinzo as prime minister,
in December 2012, and the subsequent
appointment of Kuroda Haruhiko as go-
vernor of Japan’s central bank. A key goal
of “Abenomics” was to banish Japan’s
chronic deflation through the use of rad-
ical monetary policy, including huge
central-bank purchases of bonds and
equities. A result of all the sustained
money-printing was a much weaker yen,
but not much stronger inflation. The yen’s
safe-haven status wore off, says Peter
Tasker, a seasoned observer of Japan’s
economy and markets.
Might it be restored? In a world in
which inflation is a serious concern, there
is a lot to be said for a currency which
holds its purchasing power. The yen is
now very cheap in real terms against a
broad basket of other currencies. On a
measure calculated by the Bank for In-ternational Settlements, the yen is now
more competitive than at any time since
the series began in 1994. The Economist’s
Big Mac Index, a light-hearted gauge of
purchasing power, tells a similar story.
The exchange rate required to equalise
the price of a Big Mac in Tokyo and New
York is 67; but the yen currently trades at
115 to the dollar. On this basis, the yen is
undervalued by 42%. Even if the yen
continues to trade sideways, it is likely to
become cheaper in real terms. Japan’s
inflation rate is currently just 0.5%.
America’s is 7.5%.
In the near term, risk aversion and
rising interest rates in America will
support the dollar. But the more the
Federal Reserve has to do to contain
inflation, the greater the risk of a hard
landing for America’s economy. The
dollar might eventually find itself at the
centre of a storm. In such a scenario, the
yen would rally strongly. Kit Juckes of
Société Générale, a French bank, sees a
risk that dollar-yen falls below 100 in the
next year or two. Traders might wait for
signs of trouble in America’s economy
before buying. For those who want expo-
sure now, Japan’s stockmarket has ap-
peal. It, too, is cheap: it trades on 13.6
times expected earnings. And for cau-
tious souls looking for a cheap segment
of a cheap market in a cheap currency,
Japan’s banks offer a dividend yield of
4% and trade on a single-digit multiple
of expected earnings.
The tides are shifting. Not so long ago
many investors were fearful of “Japan-
ification”, in which economies got stuck
in too low a gear to stop prices and bond
yields from falling. But now inflation is
roaring back and interest rates are on the
rise. In a world turning upside-down, the
yen’s old-fashioned virtues ought to jog
the memory.ButtonwoodThe sun also rises
The yen has retained its purchasing power. That is an overlooked virtue