The (sign: ¥; code: JPY) is the currency of Japan. It is the third most-traded currency in the foreign exchange market after United States dollar and the euro. It is also widely used as a reserve currency after the U.S. dollar, the euro and the pound sterling. As is common when counting in East Asia, large quantities of yen are often counted in multiples of 10,000 (man, 万) in the same way as values in Western countries are often quoted in thousands.

Pronunciation and etymology

The word en literally means "round object" in Japanese, as yuán does in Chinese, referring to the Imperial Chinese coins that were circular in shape and widely used in Japan up to the Tokugawa Period. In 1695, the character 元 (ghen), signifying "round or rounded") was placed on the obverse of copper coins.

The spelling and pronunciation "yen" is standard in English. This is because mainly English speakers who visited Japan at the end of the Edo era to the early Meiji era spelled words this way. In the 16th century, Japanese "e (エ)/we (ヱ)" had been pronounced [je] and Portuguese missionaries had spelled them that way. Some time thereafter, by the middle of the 18th century, "e/we" came to be pronounced [e] as in modern Japanese, although some regions retain the [je] pronunciation. Walter Henry Medhurst, who had not come to Japan and interviewed some Japanese in Batavia (Jakarta), spelled some "e"s as "ye" in his An English and Japanese, and Japanese and English Vocabulary (1830). In the early Meiji era, James Curtis Hepburn, following Medhurst, spelled all "e"s as "ye" in his A Japanese and English dictionary (1st ed. 1867). That was the first full-scale Japanese-English/English-Japanese dictionary, which had a strong influence on Westerners in Japan and probably prompted the spelling "yen". Hepburn revised all "ye"s to "e" in the 3rd edition (1886) in order to mirror the contemporary pronunciation, except "yen". This was probably already fixed and have remained so ever since.

History

Introduction

The yen was officially adopted by the Meiji government in an Act signed on May 10, 1871. The new currency, in the form of a silver coin similar to the contemporary Mexican Peso, was gradually introduced beginning from July of that year. The yen replaced Tokugawa coinage, a complex monetary system of the Edo period based on the mon. The New Currency Act of 1871 stipulated the adoption of the decimal accounting system of yen (1, 圓), sen (, 錢), and rin (, 厘), with the coins being round and cast as in the West. The yen was legally defined as 0.78 troy ounces (24.26 g) of pure silver, or 1.5 grams of pure gold. The same amount of silver is worth about 1181 modern yen, while the same amount of gold is worth about 4715 yen. The Act also moved Japan onto the gold standard. (The sen and the rin were eventually taken out of circulation at the end of 1953.)

Fixed value of the yen to the US dollar

The yen lost most of its value during and after World War II. After a period of instability, in 1949, the value of the yen was fixed at ¥360 per US$1 through a United States plan, which was part of the Bretton Woods System, to stabilize prices in the Japanese economy. That exchange rate was maintained until 1971, when the United States abandoned the gold standard, which had been a key element of the Bretton Woods System, and imposed a 10 percent surcharge on imports, setting in motion changes that eventually led to floating exchange rates in 1973.

Undervalued yen

By 1971 the yen had become undervalued. Japanese exports were costing too little in international markets, and imports from abroad were costing the Japanese too much. This undervaluation was reflected in the current account balance, which had risen from the deficits of the early 1960s to a then-large surplus of U.S. $5.8 billion in 1971. The belief that the yen, and several other major currencies, were undervalued motivated the United States' actions in 1971.

Yen and major currencies float

Following the United States' measures to devalue the dollar in the summer of 1971, the Japanese government agreed to a new, fixed exchange rate as part of the Smithsonian Agreement, signed at the end of the year. This agreement set the exchange rate at ¥308 per US$1. However, the new fixed rates of the Smithsonian Agreement were difficult to maintain in the face of supply and demand pressures in the foreign-exchange market. In early 1973, the rates were abandoned, and the major nations of the world allowed their currencies to float.

Japanese government intervention in the currency market

In the 1970s, Japanese government and business people were very concerned that a rise in the value of the yen would hurt export growth by making Japanese products less competitive and would damage the industrial base. The government therefore continued to intervene heavily in foreign-exchange marketing (buying or selling dollars), even after the 1973 decision to allow the yen to float.

Despite intervention, market pressures caused the yen to continue climbing in value, peaking temporarily at an average of ¥271 per US$1 in 1973 before the impact of the 1973 oil crisis was felt. The increased costs of imported oil caused the yen to depreciate to a range of ¥290 to ¥300 between 1974 and 1976. The re-emergence of trade surpluses drove the yen back up to ¥211 in 1978. This currency strengthening was again reversed by the second oil shock in 1979, with the yen dropping to ¥227 by 1980.

Yen in the early 1980s

During the first half of the 1980s, the yen failed to rise in value even though current account surpluses returned and grew quickly. From ¥ens 221 in 1981, the average value of the yen actually dropped to ¥ens 239 in 1985. The rise in the current account surplus generated stronger demand for yen in foreign-exchange markets, but this trade-related demand for yen was offset by other factors. A wide differential in interest rates, with United States interest rates much higher than those in Japan, and the continuing moves to deregulate the international flow of capital, led to a large net outflow of capital from Japan. This capital flow increased the supply of yen in foreign-exchange markets, as Japanese investors changed their yen for other currencies (mainly dollars) to invest overseas. This kept the yen weak relative to the dollar and fostered the rapid rise in the Japanese trade surplus that took place in the 1980s.

Effect of the Plaza Accord

In 1985 a dramatic change began. Finance officials from major nations signed an agreement (the Plaza Accord) affirming that the dollar was overvalued (and, therefore, the yen undervalued). This agreement, and shifting supply and demand pressures in the markets, led to a rapid rise in the value of the yen. From its average of ¥239 per US$1 in 1985, the yen rose to a peak of ¥128 in 1988, virtually doubling its value relative to the dollar. After declining somewhat in 1989 and 1990, it reached a new high of ¥123 to US$1 in December 1992. In April 1995, the yen hit a peak of under 80 yen per dollar, temporarily making Japan's economy nearly the size of the US.

Post-bubble years

The yen declined during the Japanese asset price bubble and continued to do so afterwards, reaching a low of ¥134 to US$1 in February 2002. The Bank of Japan's policy of zero interest rates has discouraged yen investments, with the carry trade of investors borrowing yen and investing in better-paying currencies (thus further pushing down the yen) estimated to be as large as $1 trillion. In February 2007, The Economist estimated that the yen is 15% undervalued against the dollar and as much as 40% undervalued against the euro. By February 2008, the yen had strengthened to 90 yen per U.S. Dollar.

Coins

Coins were introduced in 1870. There were silver 5, 10, 20 and 50 sen and 1 yen, and gold 2, 5, 10 and 20 yen. Gold 1 yen were introduced in 1871, followed by copper 1 rin, ½, 1 and 2 sen in 1873.
Cupronickel 5 sen coins were introduced in 1889. In 1897, the silver 1 yen coin was demonetized and the sizes of the gold coins were reduced by 50%, with 5, 10 and 20 yen coins issued. In 1920, cupro-nickel 10 sen coins were introduced.

Production of silver coins ceased in 1938, after which a variety of base metals were used to produce 1, 5 and 10 sen coins during the Second World War. Clay 5 and 10 yen coins were produced in 1945 but not issued for circulation.

After the war, brass 50 yen, 1 and 5 yen were introduced between 1946 and 1948. In 1949, the current type of holed 5 yen was introduced, followed by bronze 10 yen (of the type still in circulation) in 1951.

Coins in denominations of less than 1 yen became invalid on December 31, 1953, following enforcement of the .

In 1955, the current type of aluminium 1 yen was introduced, along with unholed, nickel 50 yen. In 1957, silver 100 yen pieces were introduced. These were replaced in 1967 by the current, cupro-nickel type, along with the holed 50 yen coin. In 1982, the first 500 yen coins were introduced.

The date (expressed as the year in the reign of the current emperor) is on the reverse of all coins, and, in most cases, country name (through 1945, 大日本 or Dai Nippon, "Great Japan"; after 1945, 日本国, Nihon koku, "State of Japan") and the value in kanji is on the obverse, except for the present 5-yen coin where the country name is on the reverse.

As of September 4, 2009, 500 yen coins are the highest valued coins to be used regularly in the world (this place is typically taken by the 5 Cuban convertible peso coins), with values in the neighborhood of US$5.50, €3.90, £3.80 and CHF 5.80. The United States' largest-valued commonly-used coin (25¢) is worth ¥23; the Eurozone's largest (€2) is worth ¥255; the United Kingdom's largest (£2) is worth ¥260; and Switzerland's largest (CHF 5) is worth ¥430. Because of this high face value, the 500 yen has been a favorite target for counterfeiters. It was counterfeited to such an extent that in 2000 a new series of coins was issued with various security features. In spite of these changes, however, counterfeiting continues.

The 1 yen coin is made out of 100% aluminum.

On various occasions, commemorative coins are minted, often using gold and silver with face values as high as 100,000 yen. The first of these were silver ¥100 and ¥1000 Summer Olympic coins issued for the 1964 games. Even though they can be used, they are treated as collectibles and normally do not circulate.

Instead of displaying the A.D. year of mintage like most nations' coins, yen coins instead display the year of the current emperor's reign. For example, a coin minted in 2009 would bear the date Heisei 21 (the 21st year of Emperor Akihito's reign).

The coins are easy to distinguish for the blind.

Banknotes

The issuance of the yen banknotes began in 1872, two years after the currency was introduced. Throughout its history, the denominations have ranged from 10 yen to 10000 yen.

Before and during World War II, various bodies issued banknotes in yen, such as the Ministry of Finance and the Imperial Japanese National Bank. The Allied forces also issued some notes shortly after the war. Since then, the Bank of Japan has been the exclusive note issuing authority. The bank has issued five series after World War II. Series E, the current series, consists of ¥1000, ¥2000, ¥5000, and ¥10,000.

Determinants of value

Beginning in December 1931, Japan gradually shifted from the gold standard system to the managed currency system.

The relative value of the yen is determined in foreign exchange markets by the economic forces of supply and demand. The supply of the yen in the market is governed by the desire of yen holders to exchange their yen for other currencies to purchase goods, services, or assets. The demand for the yen is governed by the desire of foreigners to buy goods and services in Japan and by their interest in investing in Japan (buying yen-denominated real and financial assets).

Since the 1990s, the Bank of Japan, the country's central bank, has kept interest rates low in order to spur economic growth. Short-term lending rates have responded to this monetary relaxation and fell from 3.7% to 1.3% between 1993 and 2008. Low interest rates combined with a ready liquidity for the Yen prompted investors to borrow money in Japan and invest it in other countries (a practice known as carry trade). This has helped to keep the value of the Yen low compared to other currencies.

International reserve currency

Historical exchange rate

The table below shows the number of yen per U.S. dollar (monthly average).

See also

• Japan Mint

• Japanese military yen

• Economy of Japan

• Capital flows in Japan

• Monetary and fiscal policy of Japan

• Balance of payments accounts of Japan (1960–90)

Older currency

• Japanese mon (currency)

• Koban (coin)

• Ryō (Japanese coin)

• Wadōkaichin