Of course these are interlinked, but I don’t really know how much I would call the purchasing power of the yen eroding – the yen pretty much buys the same stuff now on Japanese shelves as it did two years ago, there is not a 26% difference at least. Real effective exchange rates do not equal purchasing power because the REER looks at overseas conversions between currencies and the purchasing power parity looks at currency-to-goods conversions first and then compares those rates across markets. The fact that you get more burger for your yen in Japan than in the US is indeed indicating higher purchasing power of the yen than a direct translation from its currency rate would imply, still resulting in an undervalued currency but the abuse of terms here is as confusing as it gets!
Back to the main point – people buy goods in the real economy across world markets at exchange rates. In this trade deficit structure that Japan is facing right now, that means that the yen will take a hit. Yes, monetary easing is a large part of it, but suggesting that a trade deficit lowering the currency drives undervaluation rather than fundamental sales is a bit tenuous. (Then again, if a currency has more purchasing power than the dollar you can bet the term “undervaluation” will be thrown around in American media…)
Compensating for this, people then buy real assets or inflation/currency hedges. Like the stock market our housing.
This is where the second article gets interesting, and not just for the fact that a Hong Kong asset manager sells a Tokyo property to a Singaporean firm! (Please put me on a team doing deals like that, anyone!) Vacancy rates in Tokyo are plunging, and international investors are looking to get in on the office rental market in particular.
Deutsche A&WM estimates that the property market has been increasing a bit faster than 9% per year since Abe got slated to run the country, coupled with a 4.6 trillion yen property investment level from 2.7 trillion yen over the same period. Money is being invested and really increasing the asset return in Japan in the short term, and given the debt structure of the economy there is a lot of potential for increasing asset returns and equity market levels towards a higher base level in the future. Longer-term continued yen rates around 110-120 could probably escalate this even further if the velocity of money in Japan starts picking up again and people can “cash in” on their gains in cases where they are still not underwater, and apply a new level of freshly financed consumer debt with zero accumulated amortization.
This double approach (convert home asset increases and equity conversion to debt and cash) could be a really good shot in the arm for Japan long-term, and helps blunt some of the negative effects of inflation going above wage and salary increases, and as long as there isn’t a housing crash wiping 40-50% off the values in the next 15-20 years I would be inclined to think this might work.