Dec 12, 2023 - Economy

Ohtani's big bet on inflation and the U.S. dollar

Shohei Ohtani at a game in September. Photo: John McCoy/Getty Images

The Los Angeles Dodgers' massive contract with superstar free agent Shohei Ohtani offers a wonderful lesson in the time value of money.

Driving the news: The announced $700 million 10-year deal is misleading. Dual-threat pitcher and hitter Ohtani will make not $70 million a year but $2 million a year for a decade, followed by $68 million a year for the decade after that, when his playing days are presumably over.

  • What, in other words, will the $68 million he is slated to receive each year from 2034 to 2043 buy once converted into Japanese yen and used to buy goods and services in Japan?

Between the lines: Ohtani is implicitly making a huge bet on the future path of inflation — betting it will be low. If he intends to primarily live in his native Japan once his baseball career ends, he is also making a bet on the evolution of the real exchange rate between the dollar and yen.

By the numbers: Current bond prices imply that U.S. inflation will be 2.19% a year over the coming decade. If that proves correct, Ohtani's $68 million payout in 2034 will offer purchasing power worth about $54.8 million in current dollars.

  • If inflation were to come in at a mere 1% over that span, it would be worth $61.5 million. But if inflation surprises to the high side, at 5% a year, it would be worth only $41.7 million.
  • In Japan, meanwhile, only in recent months has the Bank of Japan seen enough evidence of inflation starting to build that it is contemplating raising interest rates above zero.

Of note: Japan has featured stubbornly low inflation for the entirety of Ohtani's lifetime, as Bloomberg's John Authers notes. That experience could have shaped his willingness to bet on the future value of the dollar.

  • The ultimate value of Ohtani's contract will depend on whether something like the Japanese experience of the last three decades is repeated in the coming 20 years — or turns out to be a historical exception.

The bottom line: Ohtani may want to become an assiduous consumer of policy announcements from BOJ and the Fed — to know just how wealthy he will really be a decade from now.

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