The Japanese yen has become demonstrably cheap - but will it stay that way?
Tokyo takes the crown as the world's cheapest major city, according to Deutsche Bank.
Tokyo is the world's cheapest major city, according to one investment bank's annual rankings.
After the yen's purchasing power parity has more than halved since 2012, renting a three-bedroom apartment in the Japanese capital costs around a quarter of the equivalent in New York and, taking taxes into account, it's the most inexpensive place globally to buy an iPhone.
While the U.S. has become more expensive relative to every other significant economy, Japan is the real cost-of-living outlier.
Relative price levels as implied by PPP - Japan is the outlier
However, there are some economists now questioning whether the yen's (USDJPY) seemingly irreversible decline can be arrested? Deutsche Bank's foreign exchange team and research house Gavekal both suggest a repatriation of capital could be a game-changer for the carry-trader's favorite funding currency.
Deutsche Bank publishes a report every summer, "Mapping The World," in which the bank compares 69 different cities across six continents to compare costs and living standards. This year's analysis shows some things haven't changed. Zurich and Geneva are the world's most expensive cities, New York and San Francisco also make the top five, while Luxembourg retains the top spot for the more subjective "quality of life."
It's the "remarkable structural repricing" of Japan, though, that grabs the attention. Apart from phones and rentals, strategist Jim Reid notes Tokyo restaurants are cheaper than Warsaw and Prague, and a two-thirds cheaper than New York or Zurich.
Why has the yen become so cheap? Reid explains that the Bank of Japan has conducted financial repression since around 2012, keeping rates artificially low, especially compared to the rest of the world where interest rates have been rising and normalizing. Reid points out, because "Japanese inflation has been relatively low globally, while its currency slumped, Japan now stands out among its developed market peers as being extremely cheap when converting to dollars ."
In a nutshell, since 2012, the yen fell 51% and inflation is only 20% higher. Equals cheap.
What could change this and prompt a sudden or even a gradual unwinding of the Japanese carry-trade, a strategy that involves shorting the depreciating currency with low interest rates and reinvesting the proceeds into an appreciating currency with higher interest rates? Estimates of the size of this exposure vary between $500 billion to north of $1 trillion.
For Reid, Japan's salvation may be provided by AI. Many of Japan's economic problems result from its demographic challenge: an ageing and shrinking population that has created labor shortages. Productivity-enhancing technologies like AI then, are economically and politically attractive.
Japan's government has a stated ambition to be the most AI friendly country in the world and its highly-developed industrial base gives it a genuine advantage when it comes to building out AI infrastructure and implementing it.
In recent days the Japanese finance minister, Satsuki Katayama, has signalled a possible shift in government pension fund assets towards domestic investment. Japanese institutions, according to a note from Deutsche Bank's Tim Baker last weekend, hold $3.4 trillion in foreign assets and he calculated that a return home of Japanese capital could potentially amount to $400 billion to $450 billion, or 10% of its GDP.
Japan institutions have $3.4 trillion in foreign assets - more than 1/3rd of the total Other economists think it's even higher
Gavekal economist Udith Sikand estimates Japanese institutions actually hold $7 trillion of foreign assets and only 25% exposure to Japanese government bonds. He points out that Katayama has proposed adding JGBs BX:TMBMKJP-10Y to popular, tax-free investment schemes and concludes that if the government of Sanae Takaichi can remain in office long enough, it probably will encourage domestic institutions to increase their local exposure.
Final factoids from the Deutsche Bank report:
-- Rome is the world's cheapest place to buy wine
-- You can have two dates in Tokyo for the price of one in London
-- Tel Aviv has the world's most expensive Big Mac
-- The world's most expensive iPhones are sold in Turkey
-Jules Rimmer
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(END) Dow Jones Newswires
July 14, 2026 05:04 ET (09:04 GMT)
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