Brad Setser on the US's Unusual Japanese Yen Intervention – Odd Lots

Brad Setser on the US's Unusual Japanese Yen Intervention – Odd Lots

Market views

Bullish

JPY— The Japanese yen is significantly undervalued by multiple metrics (Big Mac Index, purchasing power parity, behavioral equilibrium models) and has overshot fundamentally. With the BOJ likely to raise rates and Japan's strong fiscal position (primary balance now flat, current account surplus of 5% GDP), the yen should strengthen from current levels around 155-160 per dollar.

Bearish

USD— US fiscal position is deteriorating significantly compared to Japan, with primary deficit at 6% of GDP versus Japan's balanced primary budget. Net debt trajectory favors Japan despite rhetoric, suggesting dollar weakness versus yen over time.

Not investment advice.