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How Japanese Hyperinflation Starts (In 1 Chart)

The Japanese Yen's real effective exchange rate (REER) has collapsed to the weakest since 1982, according to Mitsubishi UFJ Morgan Stanley Securities. Simply put, REER is a trade-weighted measure of Yen strength (or weakness) against, in this case, 59 trading partners; and as the nation posts an unprecedented 27th straight month of trade deficits [43rd straight month of Seasonally-adjusted trade deficits], Bloomberg reports MUFJ indicates "a structural shift" has taken place.

 

 

As a reminder, the Real Effective Exchange Rate (REER) is:

The weighted average of a country's currency relative to an index or basket of other major currencies adjusted for the effects of inflation.

 

The weights are determined by comparing the relative trade balances, in terms of one country's currency, with each other country within the index.

 

This exchange rate is used to determine an individual country's currency value relative to the other major currencies in the index, as adjusted for the effects of inflation.

 

This is also the value that an individual consumer will pay for an imported good at the consumer level. This price will include any tariffs and transactions costs associated with importing the good.

In the case of an average Japanese person who likes Big Macs, they will pay 71% more (in JPY) for the McDonalds' haute cuisine if they come to America than they would at home.

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In the case of the Yen, MUFJ warns, "In Japan’s post-float history, the strength of demand for dollars and other foreign currencies among importers has never been higher."

This is a problem as Daisaku Ueno exclaims, "If the trade deficit doesn’t noticeably narrow from here, the yen’s real effective rate could fall to levels never seen before," and, ominously, "from a supply and demand perspective, yen selling for foreign currency by Japanese importers will just continue endlessly."

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And sure enough, tonight's trade deficit is the worst in 6months as imports surge...

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Simply put - as Kyle Bass has warned all along - the JPY becomes self-fulfillingly destroyed by the vicious cycle of trade deficit-facing importers who need to pay in foreign exchange for goods received... et voila, hyperinflation (or the BoJ entirely reverses track and blows up the world's carry traders) and Japan becomes Venezuela...

Source: Bloomberg