Time to look at the yen's real exchange rate

The yen's real effective exchange rate (REER) suggests that the short yen consensus macro trade could be in its last innings.

The yen still seems significantly overvalued versus history on a nominal basis - the monthly average for the yen's nominal effective exchange rate (NEER) in January 2013 was roughly 0.7 standard deviations above its historical average since 1994.

However, as inflation levels in Japan have been much lower than the rest of the world, this has not translated into a loss of competitiveness as measured by the yen's REER (low relative inflation offsets a high nominal exchange rate and vice versa).  The yen's REER in January 2013 was actually 1.4 standard deviations below its historical average since 1994.

The story stays the same even if we look at the yen relative to the Korean won. 

Note: 

a) Nominal EERs (NEERs) are calculated as geometric weighted averages of bilateral exchange rates. Real EERs (REERs) are the same weighted averages of bilateral exchange rates adjusted by relative consumer prices. 

b) Conclusions of analysis may differ based on time periods used; the BIS' broad indices have data from 1994 (used in above analysis).