´´ Dirt Cheap Japan

Thursday, January 6, 2022

Dirt Cheap Japan

Something ridiculous is going on in the Yen exchange rate versus its major pairs. Although the nominal exchange rate barely changed over the last 27 Years, the real Yen/ Dollar and real trade weighted Yen has depreciated to levels not seen since before the Plaza Accord of 1985. 

Given the systematic underreporting of deflation in Japan over a prolonged period, the “real- real” Yen likely has depreciated even more, to levels just before the “Nixon shock” of August 1971. Simply put: Japan is dirt cheap!

But how cheap is Japan on the ground? Basically, Japan’s nominal prices for goods and services appear being frozen since the beginning of the 1990’s.

A visit to Tokyo Disneyland is already very revealing. With an entrance fee of only $72 it is similarly priced to an emerging market, Disneyland Shanghai. And a steel compared to Disneyland in California ($129). Or take accommodation. A 50 sqm luxury hotel room with a king-size bed in London cost as much as $1,500 for two adults. A similar room in Tokyo is available for around $700.

Let’s look at dining. A Big Mac has a price tag of $3,50 in Japan and $5.74 in the U.S. That means an American in Tokyo can get 1,6 Big Macs compared to his homeland. Sushiro is one of Japan’s most popular conveyors- belt sushi restaurant. The main reason? It is dirt cheap! The only place on planet where you get 2 Pieces of Sushi for $ 0,90. What about a whole evening meal at a medium-priced restaurant? Well, it would cost you only $ 9 per person.

The company Daiso is a neat little method to compare prices of tradeable goods in Japan to those tagged internationally. Daiso is the Japanese equivalent of Dollar tree, selling articles for 100 yen ($ 0,9), and runs stores in 24 countries like Korea and Taiwan, and even the US. It turns out that only in Japan Daiso offers its products for 100 Yen. Average price in other countries come in at 150 - 200 Yen.

The list goes on and on. Tokyo prices compared to 5 other cities (London, New York, Seoul, Shanghai and Singapore) ranked 4th for a 1.5-liter bottle of water ($1,1), 5th for a dozen medium-sized eggs ($2,2); last for a tall-size cafe latte at Starbucks (at $3,3) and for mid-range priced Nike running shoes ($70). Tokyo’s highest-ranked item was a second place for a ¥420 basic taxi fee.

According to Jesper Koll, Japan expert at Wisdom Tree Investments, Tokyo is the only major city in the world where you can afford to buy an apartment within a 45-minute commute from downtown Tokyo with an average Starbucks salary. If true that is quite remarkable indeed! Especially, given the fact that Japanese workers receive the second-lowest average minimum wage ($ 7,7) after the United States. Roughly 30% lower than the country with the highest (France).

In general, Japanese wages have been stagnating for almost three decades. Average (nominal) wages in Japan have increased by only 0.4% compared to 25.3% in the United States, 25.5% in Canada, 17.9% in Germany and 43.5% in South Korea.

The annual income of a Japanese university grad is only $ 21´500, compared to Germany $ 43’000 and US $ 52’000. Japan’s IT professionals in their 30s earn less than half of their US peers.

The average income of Tokyo’s richest district ($ 103’000), would be considered low income in San Francisco.

The stagnation of nominal wages is reason for a 500 Yen beef bowl and 1000 Yen hair cut being common in Japan.

Applying this idea of the Big Mac index to a weighted Japan basket of products and services the Yen appears to be undervalued by a staggering 30- 40 % against major currency pairs. Comparing Japanese wages to those paid in other G7 appears to back this hypothesis. The undervaluation of the Yen appears to be more pronounced in Services/ and Wages than for tradeable goods.

There is no doubt that without the corona virus Japan would have been on track printing record number of tourist arrivals year in year out, partially arbitraging away this incredible international price competitiveness.

In absence of mass tourism, there are only two possible transmission channels left to correct cheap Japan:

1.) Yen appreciation so that the international purchasing power can be restored

2.) Raise wages. For example: A significant increase of the Japanese minimum wage would force small and medium-sized companies to change business models that are dependent on cheap labor

Personally, I expect wages and the yen rising in tandem. And a future tourism strategy focusing on quality rather than quantity to overcome Cheap Japan.



Surprises from Japan plus an ultra-leveraged play on gold – The Adventurous Investor

Believe it or not, ‘expensive’ Japan is actually underpriced | The Japan Times

Cheap Japan: From Disney to Big Macs, prices are frozen in time - Nikkei Asia

3 Reasons Why Japan's CHEAPNESS is Harmful to Society! The Horrifying Truth That No One Talks About - YouTube

Chinese studios lure Japan’s struggling anime artists | Financial Times (ft.com)

"Cheap Japan" will be the driving force behind Japan's revival | Musha Research

Microsoft Word - dp74.exchange.rate.stabilization.yen.doc (adb.org)


1 comment:

  1. The undervalued yen is just another good reason to invest in Japan.

    The last two years have presented numerous Japanese deep value opportunities.

    Even now, I've been able to re-cycle profits taken at bargain shares picked up in 2020 and early 2021 into new investments trading at less than a third of tangible book and at a discount to net cash.