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The World Price Index

Released: May 16, 2016
Japanese Yen overvaluation continues against US$

  • Weakening Canadian Loonie 7% undervalued
  • Argentine Peso strengthens to 6% in PPP terms
  • Sterling rises by 4% against US dollar in May

Japanese Yen instability remains
The latest set of World Price Index (WPI) data for May illustrates the fundamental value of currencies in terms of purchasing power parity (PPP) against the US dollar. It provides a useful counterpart to the continually fluctuating relative value of currencies on foreign exchange markets that reflect short-term considerations which affect the supply and demand for a currency on a daily basis. These fluctuations are separate from a currency’s longer-term purchasing value based on differences in the domestic relative prices of traded and non-traded goods between countries.

These differences between long-term and short-term are shown clearly in the case of Japan using data tracking the foreign exchange rate against Japan’s monthly WPI since the survey began at the end of 2012. In December 2012, one US$ bought only ¥83.6. One year later the Japanese currency had depreciated against the US dollar to such an extent that the rate was ¥103.5, a fall in value of 24%. By December 2015, the Yen had fallen further to reach ¥123.4, another depreciation of 19%, but by May 2016, one US$ bought ¥106.6, a 14% rise in the value of the Japanese currency.


The Yen overshoots its PPP value
On May 5, the Japanese Prime Minister Shinzo Abe expressed his government’s dissatisfaction with the extreme fluctuations seen in the value of the Yen in recent years. He argued against the adverse impact of a fluctuating currency on trade related Japanese companies and on economic stability threatening to respond if necessary. Such responses are justified only if the Yen moves far away from its fundamental value in PPP terms. This can be assessed by tracking the under and overvaluation of the Japanese currency in PPP terms using WPI data and forex rates.

The data shows that in December 2012, the Yen was overvalued by 83% against the US dollar with a forex value of ¥83.6 and a WPI value of ¥153.4. The international and domestic consensus was that a high Yen was slowing down the growth in the economy and causing deflation. The Bank of Japan embarked on a major asset purchase quantitative easing programme aimed at stimulating the economy, raising inflation and bringing down the value of the Yen. Only the latter worked and the Japanese currency hovered around PPP parity with the US$ from January to September 2015. The May WPI data shows the fundamental value of the Yen rising by 6% since April. If this trend continues the government has stated it is ready to take further action which can only mean loosening monetary policy even further.


Canada Loony 7% undervalued
The WPI data for May shows that the Canadian dollar was undervalued by 7% against the US$ in PPP terms. One US$ bought C$1.27 on foreign exchange markets while the WPI price was only C$1.19. After a period of overvaluation against the US$, the Loonie has weakened steadily for eighteen months on the back of falling oil prices and stayed close to parity with the US$ from January to May 2015 before weakening again in PPP terms. There has been a brief recovery since February 2016, but the Canadian economy has now had a major shock which could weaken the Loonie in the coming months. The out of control forest fire in Alberta is likely to hit oil production exacerbating an otherwise downward effect on GDP.


Argentine Peso 6% overvalued
The economic value of the Peso in Argentina continues to improve in terms of its PPP exchange rate. In May, the fundamental value of the currency came in at an overvaluation of 6%. This month one US$ acquired 14.69 Pesos while the WPI rate was 14.79 Pesos to one US$. Investors remain confident in the economic policies of the incumbent President.


Sterling 5% Overvalued
Despite the uncertainty over the possible results of the EU referendum on June 23, which could lead to the UK leaving the European Union, there has been no impact on the PPP value of Sterling. The WPI data showed that in May the value of sterling rose by 4% against the US dollar.


About the World Price Index
The World Price Index (WPI) measures the value of an urban selection of goods and services at purchasing power parity (PPP), reflecting the real purchasing power of different nations, allowing for rapid and accurate international price comparisons. Under/Over valuation data is based on the difference between the exchange rate value of a currency and that of the US Dollar in relation to the World Price Index calculated exchange rate. Based on WPI global data the degree of currency under or over valuation in PPP terms by country is provided in the table and chart below.
 

















Notes to Editors
  • The World Price Index is based on original data collected by World Economics.
  • The World Price Index is released on the 2nd Working Tuesday of each month.
  • Latest month market exchange rates are calculated as an average of daily rates.

About The World Price Index
The World Price Index is calculated monthly from a basket of internationally comparable goods and services. It is designed to alleviate the horrendous problems associated with analysing economic or market data using currency market exchange rates.

Exchange rates vary with extraordinary rapidity, frequently with little obvious link to economic reality, but fatally distorting the perception of value in markets and economies. It is vital when analysing international data, whether for market analysis purposes, or to allocate resources across the globe, to review data using an international yardstick of value. This can only be done using Puchasing Power Parities (PPP), which make allowance for the purchasing power of currencies within individual countries to make comparisons based on a standard currency, usually "international dollars".

There are various sources of PPP data, but most are of only academic interest as they are years out of date. The World Price Index is the only available index updated monthly to provide an easy way of reviewing trends or relative values of market or economic data in realistic terms.


About World Economics
World Economics is an organisation dedicated to producing analysis, insight and data relating to questions of importance in understanding the world economy. Its parent company Information Sciences Ltd has a long history of the development of key business information today used throughout the world, including the origination of the Purchasing Managers Indexes in Europe and Asia (now owned by Markit), and the development of WARC a global information provider for major corporations .

Currently our primary research objective is to encourage and assist the development of better and faster measures of economic activity. In cases where we believe we can contribute directly, as opposed to through highlighting the work of others, we are producing our own measures of economic activity.

Our work is mainly of interest to investors, organisations and individuals in the financial sector and to significant corporations with global operations, as well as governments and academic economists.

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