BNY’s Geoff Yu highlights that the Japanese Yen (JPY) remains significantly undervalued on a Real Effective Exchange Rate (REER) basis, even as the Euro (EUR) and US Dollar (USD) valuations have converged over the past six months, according to Bank for International Settlements’ (BIS) REER indices [1]. Yu notes that while the dollar and euro have reached valuation parity, the yen has not experienced a similar appreciation, instead undergoing a period of secular depreciation [1].
The report emphasizes that the risks associated with sustained and significant JPY undervaluation are more pronounced for Europe than for the United States, primarily due to export competition. This competitive risk has been somewhat mitigated over time, especially in the automotive sector, where China has disrupted global markets [1]. While the issue of U.S. tariffs has diminished in the short term, it remains a long-term concern that could eventually force REER appreciation [1].
Yu points out that United States–Japan coordination on exchange rates is already underway. He references U.S. Treasury Secretary Scott Bessent’s recent trip to Tokyo, which coincided with a sharp, brief drop in USD/JPY. The market is expected to scrutinize intervention figures at the end of the month to assess the Japanese Ministry of Finance’s commitment to intervening in foreign exchange markets, though there has been little evidence of effective intervention so far [1].
The analysis suggests that Europe should take a more proactive stance in response to JPY weakness, as it poses greater risks to Eurozone exporters than to their U.S. counterparts [1].
CONCLUSION
BNY’s analysis underscores the persistent undervaluation of the Japanese Yen and its implications for global export competition, particularly for Europe. Market participants are closely watching for signs of intervention by Japanese authorities, but concrete action remains limited. The situation calls for increased vigilance from European policymakers as JPY weakness continues to affect competitive dynamics.