Weak Yen Undervalued by Much More Than Big Mac Index, Pigging Out on Pork Cutlet Curry

An analysis suggests that the foreign exchange market is undervaluing the yen far beyond its actual worth, as gauged by the local price of Japanese pork cutlet curry, or tonkatsu curry.

Bloomberg reported on the 12th that Jeffrey Yu, a senior strategist at Bank of New York Mellon, has created and is using a new index based on Japan's signature fast food, tonkatsu curry, inspired by the Economist's Big Mac Index.

The index compares purchasing power across countries using the price of tonkatsu curry at the curry restaurant chain CoCoICHI, based on the rationale that an international price comparison of tonkatsu curry rather than hamburgers better reflects how the weak yen feels inside Japan.

In the international foreign exchange market today (the 12th), one dollar traded in the 159-yen range, but calculations using this index yielded a fair value of 62.18 yen per dollar.

The Big Mac Index suggests a fair value of 80.3 yen per dollar, meaning the yen is significantly more undervalued than that.

Strategist Yu said, "When the price of a bowl of tonkatsu curry or ramen in Japan reaches an unaffordable level, demands for a policy shift will grow stronger."

The impact of recent joint intervention by U.S. and Japanese authorities appears to be fading rapidly for the yen.

Last month, the yen dropped to the 163-yen range per dollar, a 40-year low, before rebounding to 155 yen following the most powerful joint U.S.-Japan intervention in 15 years.

However, in less than two weeks, it has given up about half of those gains and slipped back to the 159-yen range.

This is interpreted as the result of the resumed carry trade driven by the interest rate gap between the U.S. and Japan—borrowing funds in a low-interest currency to invest in high-yield assets.

Jasper Cole, a senior executive at Monex Group, said, "Intervention merely scared the market; it could not stop the financial law of money flowing in pursuit of maximum returns."

The fundamental cause is pointed to as the still-wide gap between the 10-year U.S. Treasury yield (4.686%) and the 10-year Japanese government bond yield (2.846%).

Masahiko Lu, a senior strategist at State Street Global Advisors, assessed, "While intervention succeeded in resetting market sentiment, it did not eliminate the yield advantage supporting the dollar."

Some analyses suggest the actual purpose of this intervention was less about defending the yen itself than protecting the U.S. Treasury market.

Typically, for Japan to defend the yen, it must sell its holdings of U.S. Treasuries to secure funds, which can lead to upward pressure on U.S. Treasury yields.

This time, interpretations gained traction that the Federal Reserve Bank of New York sold euros instead of dollar assets to buy yen, aiming to reduce Japan's need to sell U.S. Treasuries.

Behind this unusual coordination, critics note that U.S. Treasury Secretary Scott Bessent is financing the government primarily through short-term debt rather than expanding long-term issuance ahead of the November midterm elections, thereby suppressing interest rate hikes.

With the U.S. national debt reaching 123% of gross domestic product (GDP), the capacity for government-led foreign exchange intervention and policy coordination is steadily shrinking.

Consequently, forecasts suggest that even if verbal interventions buy time until the election, adjustments in the form of higher long-term interest rates or exchange rate instability will ultimately be inevitable.

Credit Agricole CIB pointed to "investment power asymmetry"—where massive U.S. artificial intelligence (AI) investments continue to draw capital while Japan's public-private investment expansion measures have yet to take full effect—as the root cause alongside the interest rate gap, stating, "What is needed to correct the weak yen is not a rate hike, but expanded investment."

Market attention is turning to the Bank of Japan's monetary policy meeting scheduled for next month.

Market forecasts regarding the possibility of a rate hike vary between the 50% and 60% ranges across media outlets and institutions, and a larger hike could narrow the interest rate gap and reduce incentives for the carry trade.

Meanwhile, while some view that surpassing the 160-yen threshold could trigger additional intervention, signs are also detected of the market accepting the 160-yen range as a "new equilibrium point."

(Photo: Yonhap News)
※ Please note: This article was translated by AI and may contain errors.