Remember the Big Mac Index, created – half in jest – by the Economist back in 1986 to measure purchasing power parity between countries, and named after McDonald’s eponymous best-selling burger?
Since then, the Economist, billing - in typically modest style – the index as “arguably the world’s most accurate financial indicator to be based on a fast-food item”, has published it every year.
In the context of Japan – one of McDonald’s top overseas markets – it is worth looking at what the latest Big Mac Index, published last month, can tell us about the yen.
Amid the cacophony of opinion about the Japanese currency’s concerted rise against the dollar (to a 15-year high of Y83.60 on Tuesday before a slight dip to Y84.61 on Wednesday), “burgernomics” has a rather interesting take.
As of late July, the price of a Big Mac in Japan, at Y320 ($3.78 under Wednesday’s exchange rate), represented an exchange rate of Y85.7 in implied purchasing power parity of the dollar. The actual yen/dollar exchange rate then was Y87.2 – meaning the Japanese Big Mac was 2 per cent under-valued against the dollar, according to the index.
But here’s a beautiful twist: earlier in August, McDonalds cut the price of a Big Mac in Japan to just Y200 as part of a summer campaign – which amounts to a 30 per cent discount, in both burger and PPP terms.
As the Japan Times reports, although the discount period runs only until August 26, “it’s likely that the price will not return to its former level.” McDonald’s has received enormous free coverage of the deal on TV news and in tabloids, and has already done well with the breakfast crowd by reducing its McGriddle product from ¥200 to ¥100 on an indefinite basis, the report notes.
So, you can forget Japan’s angst-ridden exporters. As far as the world’s most “accurate” financial indicator based on a fast-food item goes, it would seem that the yen has reached its natural level and – indeed, is even a bargain.
Related links:
Yen intervention 101: why it won’t work – FT Alphaville
BoJ sees few ways to lift demand – NY Times
Intervention threats: the never-yending story – FT Alphaville
Burgernomics: A Big Mac guide to purchasing power parity – AllBusiness