This Great Graphic was composed on Bloomberg. It draws on the Bank of England's trade-weighted indices of the dollar (yellow line), the euro (white line), and yen (green line). The data was further indexed to the end of 2009.
Trade-weighted measure is more important than bilateral measures when considering the impact of currency movement on a domestic economy. That needs to be coupled with measures of export and import elasticities.
The magnitude of yen's move is stunning. Without a significant crisis Japan has seen the yen on a trade-weighted basis first appreciated by 20% in the 2010-2012 period, and subsequently fallen by a little more than 40%. Between October 15 and December 8 it fell by 11%.
Contrary to what many would have expected. The Japanese trade surplus has deteriorated. In 2009, it recorded an average monthly trade surplus of JPY223 bln. In 2013 the average monthly trade deficit was JPY956 bln. In the first nine month of this year trade deficit has averaged JPY936 bln. The November trade report will be released the early on December 17 in Tokyo. It is expected to be around average.
In addition, as we learned yesterday in the Tankan Survey, the more acceleration of the BOJ's asset purchases, the 9% weakening of the yen and 24% rise in the Nikkei from mid-October to December 8 failed to lift business sentiment. The US economy appears also largely immune to the dollar's appreciation. Since it bottomed in 2011, the BOE's measure of the US dollar trade- weighted index has risen by 28%. Almost half of this (12.7%) has been recorded since this past July.
After a largely (but not solely) weather induced contraction in Q1, the US economy proceeded to record its fast six months of growth (April-Sept) in more than a decade. job growth accelerated this year. Us exports are at record highs. Concern that the recovery in US manufacturing was dependent on a weak dollar seems misplaced. The US reported yesterday that manufacturing output rose 1.1% in November, the third best monthly performance since H2 2010. Capacity utilization rose above 80% for the first time since March 2008.
Compared with the yen and dollar, the euro on the BOE's trade-weighted measure has hardly moved. From March through early October, the euro eased 5.5% on this basis. It has recouped a third of that loss over the last two and half months. Prior to EMU, Europe was mostly relatively small and open economies. The eurozone now is largely but not as open (exports and imports out of the currency union as a percentage of the total GDP).
The stimulative impact from the decline in the euro is being exaggerated if one simply looks at the bilateral euro-dollar exchange rate. The OECD estimates that the euro is only about 3.5% under-valued against the dollar. Given the magnitude of the past overshoots, a large and more sustained under shoot seems a reasonable expectation. The OECD estimates that at JPY116.50, the yen is about 14% under-valued against the dollar.
