Currency coordination can be a treat for the taste buds. When officials from the world’s largest economies negotiated the Louvre accord in 1987 to stem the dollar’s collapse, they didn’t go hungry. They sustained themselves with a turbot soufflé cardinal and fine wine from the cellars of the French Ministry of Finance.
Japan and the US may once again join forces to guide their currencies (rep phto)Japan and America may once again join forces to guide their currencies. If they need a tasty bite to accompany their conversation, they could do worse than ordering a Big Mac. McDonald’s most famous burger provides a clear illustration of Yen’s confusion. The average price of a Big Mac in Japan is ¥480. Converted to dollars at market exchange rates, that’s just $3 or so, about half the price of the same burger in America ($6.12). This is a telltale sign of a deeply undervalued yen.
According to an economic principle known as purchasing-power parity, the value of a currency should reflect the amount it can purchase. If it takes one galleon to buy a basket of goods in the wizarding world of Harry Potter and $7 to buy the same goods in America, then the purchasing power of a galleon is seven times that of a greenback. The exchange rate between the two should therefore be about $7 to the galleon. If the actual market rate is different from that, the currencies are added incorrectly.
Any application of this principle runs into practical difficulties. What should the basket include? And what ensures that the items are really the same in each country? One answer is the International Comparison Program, led by the World Bank, which sets prices for hundreds of items, rigorously defined to ensure that each is comparable across borders. It is one of the largest statistical enterprises in the world.
The Economist takes a simpler approach. Since 1986 we’ve compared the price of one item, the Big Mac, around the world. To ensure product consistency across the country, we relied on McDonald’s Corporation’s proactive commitment to consistency.
The latest edition of the Big Mac Index shows that Japan is not the only major Asian economy with a cheap currency (see chart). A Chinese Big Mac costs just $3.66, meaning the yuan is 40% undervalued. In India, McDonald’s does not serve beef burgers. But its Maharaja Mac, featuring a double chicken patty garnished with jalapeños and habanero sauce, is just $2.51. This suggests that the burger lacks sizzle in Rs.
The depreciation of the rupee and yuan has also worsened over the past year. In India’s case, this is hardly surprising: its currency has been slipping for years. China is more interesting. The yuan has actually strengthened against the dollar over the past year and especially over the past month. But foreign-exchange market movements were offset by the opposite trend in burger prices. The price of a Big Mac in China is now what it was in January 2025, even as the price of a Big Mac in America has risen. So the yuan’s purchasing power for burgers has remained stable, while the dollar has depreciated. Although the dollar has fallen, it hasn’t weakened enough to reflect the bank’s depleted reserves.
America seems mustard-hopeful to realign world exchange rates. “I would have fought like hell” with China and Japan, Donald Trump said on January 27, “because they always wanted to … undervalue, undervalue, undervalue.” Now the dollar is falling and the president of America is thinking “this is great”. Such rhetoric, which has helped deepen the dollar’s slide this week, represents a form of intervention. Signals of US support for Japan’s efforts to strengthen the yen also weighed on markets. But it is hard to imagine a return to the grand currency diplomacy of the 1980s, when world leaders would repeatedly conspire to manipulate their exchange rates. A sumptuous dinner accompanied the Louvre deal. Today’s ad hoc interventions are like fast food.
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