Does purchasing power parity work?28 September, 2010, 16:32. Posted by Zarathustra
Tags: Japan, Japanese Yen, US, US dollar
In general, no one really believe in purchasing power parity, at least in short-run.
But when we look at the chart, the inflation numbers were in negative territory in most part of the last 10 years or so in Japan. And guess what, JPY is now at record high, so high that Bank of Japan can’t help but to intervene.
The implication is interesting. Their seems to be two schools of thoughts regarding the future of US economy in general. One school of thought is that US is heading to deflation, like Japan. The reasoning behind is that the deleveraging process is long thus it keeps aggregate demand low. The second school thinks that it is heading to hyper-inflation. The reason is that the Fed is pumping too much money. Both arguments have their fans, and both seem to make sense.
Source: BOJThe implication for USD is interesting: if US is heading to a Japanese style deflation, USD will strengthen. Else, it collapses.