Real Effective Exchange Rate

Explanation of Real Effective Exchange Rate (REER)

The real effective exchange rate is an indicator that measures the purchasing power a nation's currency holds against the currencies of its major trading partners. By incorporating relative changes in price levels into the nominal exchange rate, it represents a more substantive measure of currency value. It is displayed in index form with 2020 as the base year (100), and is calculated from weighted average rates with multiple major trading partners.

The importance of this indicator lies in assessing international competitiveness. When the real effective exchange rate declines, a country's goods and services become relatively cheaper, improving export competitiveness. Conversely, when it rises, export goods become more expensive and competitiveness tends to decline. As a factor directly linked to corporate profitability, employment, and economic growth rates, it is closely monitored by policymakers and investors.

Japan's real effective exchange rate has shown a gradual declining trend over the long term. This reflects the background that Japan's inflation rate has been lower than major developed nations. In recent years, with rising global inflation and the Bank of Japan's monetary easing policy, the yen has weakened and the real effective exchange rate has declined. This movement strengthens the export competitiveness of Japanese companies while raising import prices, affecting household purchasing power. The point to watch is the long-term impact of this indicator's continued fluctuations on the current account balance and industrial structure.