Japanese yen
The yen is the official currency of Japan. It is the third-most traded currency in the foreign exchange market, after the United States dollar and the euro. It is also widely used as a third reserve currency after the US dollar and the euro.
The New Currency Act of 1871 introduced Japan's modern currency system, with the yen defined as of gold, or of silver, and divided decimally into 100 sen or 1,000 rin. The yen replaced the previous Tokugawa coinage as well as the various hansatsu paper currencies issued by feudal han. The Bank of Japan was founded in 1882 and given a monopoly on controlling the money supply.
Following World War II, the yen lost much of its pre-war value as Japan faced a debt crisis and hyperinflation. Under the Bretton Woods system, the yen was pegged to the US dollar alongside other major currencies. After this system was abandoned in 1971 with the Nixon Shock, the short-lived Smithsonian Agreement temporarily reinstated a fixed exchange rate. However, since the end of that system in February 1973, the yen has been a floating currency.
The Ministry of Finance and the Bank of Japan have sometimes intervened in the currency market in recent years, to try to slow down exchange rate movements. There were intermittent interventions from 1998 to 2003 and from 2010 to 2011 to curb excessive and speculative appreciation of the yen, and again in 2022 and 2024 to slow down speculative selling of the currency. The first two interventions were coordinated with respective countries, and the IMF has repeatedly stated that Japan is "committed to a flexible exchange rate".
Pronunciation and etymology
The name yen derives from the Japanese word, which borrows its phonetic reading from Chinese yuan, similar to North Korean won and South Korean won. Originally, the Chinese had traded silver in mass called sycees, and when Spanish and Mexican silver coins arrived from the Philippines, the Chinese called them "silver rounds" for their circular shapes. The coins and the name also appeared in Japan. While the Chinese eventually replaced with, the Japanese continued to use the same word, which was given the shinjitai form in reforms at the end of World War II.The spelling and pronunciation "yen" is standard in English, because when Japan was first encountered by Europeans around the 16th century, Japanese and were both pronounced. Accordingly, Portuguese missionaries spelled them as "ye". By the middle of the 18th century, and came to be pronounced as in modern Japanese, although some regions retain the pronunciation. Walter Henry Medhurst, who had neither been to Japan nor met any Japanese people, having consulted mainly a Japanese-Dutch dictionary, spelled some "e"s as "ye" in his An English and Japanese, and Japanese and English Vocabulary. In the early Meiji era, the American physician and translator James Curtis Hepburn, following Medhurst, spelled all "e"s as "ye" in his A Japanese and English dictionary ; in Japanese, e and i are slightly palatalized, somewhat as in Russian. 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", which appeared in the 2nd edition. Hepburn revised most "ye"s to "e" in the 3rd edition to mirror the contemporary pronunciation, except "yen".
History
Early history (1868–1876)
Although the Edo Shogunate collapsed with the Meiji Restoration and a new government was born, there was no immediate change to the monetary system. During this unstable period, the confusion caused by this form of exchange caused economic turmoil. The gold system of eastern Japan and the silver system of the western Japan were not unified, and the difference in the gold-silver ratio caused a large amount of gold to flow overseas at the end of the Tokugawa shogunate. Emperor Meiji responded to this by appointing Ōkuma Shigenobu as head of Japan's monetary reform program. He worked with Inoue Kaoru, Itō Hirobumi, and Shibusawa Eiichi to run the Ministry of Finance, seeking to introduce a modern monetary system into Japan. Ōkuma eventually proposed that coins, which were previously square, be made into circular discs, and that the names of the traditional currencies, ryō, bu and shu, be unified into yen, which was accepted by the government. Other rejected proposals included physical weight units of "Fun" and "Momme" which never made it past the pattern stage.The first gold yen coins consisted of 2, 5, and 20 yen coins which were struck throughout 1870. Five yen coins were first struck in gold for the Japanese government in 1870 at the San Francisco Mint. During this time a new mint was being established at Osaka, but this did not receive the gold bullion needed for coinage until the following year. Gold bullion was delivered from private Japanese citizens, foreigners, and the Japanese government. Initially the government opted for silver, which would become the standard unit of value, leaving gold coinage as a subsidiary. While gold coinage could not be produced domestically in 1870, the mint at Osaka could produce silver coins, and these included denominations of 5, 10, 20, and 50 sen. None of these coins dated "1870" circulated until the Meiji government officially adopted the "yen" as Japan's modern unit of currency on June 27, 1871. This Act formally stipulated the adoption of the decimal accounting system of yen, ', and '. The new currency was gradually introduced beginning from July of that year.
Japanese yen-denominated paper currency was also conceived with the coins in 1870, as Meiji Tsuho notes by Italian engraver Edoardo Chiossone. These were released as fiat currency in denominations of 1, 2, 5, 10, 50, and 100 yen along with subsidiary notes of 10, 20, and 50 sen in 1872. Almost concurrently, the government established a series of national banks modeled after the system in the United States, which issued national bank notes.
Satsuma Rebellion and aftermath (1877–1887)
Massive inflation from the Satsuma Rebellion in 1877 caused a glut of non-redeemable fiat currency notes. The issuance of national fiat banknotes was ultimately suspended in 1880 by then prime minister Matsukata Masayoshi. New policies were put into place which included the establishment of a centralized banking system.The Bank of Japan began operations on October 10, 1882, with the authority to print banknotes that could be exchanged for the old Government and National Bank Notes. By May 1883, another act provided the redemption and retirement of national bank notes. The National Bank Act was amended again in March 1896, providing for the dissolution of the national banks on the expiration of their charters. This amendment also prohibited national bank notes from circulating after December 31, 1899. In that year, Japan adopted a gold exchange standard, defining the yen as 0.75 g fine gold or US$0.4985.
This exchange rate remained in place until Japan left the gold standard in December 1931, after which the yen fell to $0.30 by July 1932 and to $0.20 by 1933.
It remained steady at around $0.30 until the start of the Pacific War on December 7, 1941, at which time it fell to $0.23.
The sen and the rin were eventually taken out of circulation at the end of 1953.
Fixed rate of the yen to the U.S. dollar
No true exchange rate existed for the yen between December 7, 1941, and April 25, 1949; wartime inflation reduced the yen to a fraction of its prewar value.After a period of instability, on April 25, 1949, the U.S. occupation government fixed the value of the yen at ¥360 per USD through a 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, ending a key element of the Bretton Woods system, and setting in motion changes that eventually led to floating exchange rates in 1973.
Yen and major currencies float
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 US$5.8 billion in 1971. The belief that the yen, and several other major currencies, were undervalued motivated the United States' actions in 1971.Following the United States' measures to devalue the dollar in the summer of 1971, the Japanese government agreed to a new, fixed exchange rate as part of the Smithsonian Agreement, signed at the end of the year. This agreement set the exchange rate at ¥308 per US$. 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.
Yen adoption in Okinawa
After World War II the United States-administered Okinawa issued a higher-valued currency called the B yen from 1946 to 1958, which was then replaced by the U.S. dollar at the rate of $1 = 120 B yen. Upon the reversion of Okinawa to Japan in 1972 the Japanese yen then replaced the dollar. In light of the dollar's reduction in value from ¥360 to ¥308 just before the reversion, an unannounced "currency confirmation" took place on October 9, 1971, wherein residents disclosed their dollar holdings in cash and bank accounts; US$60 million were entitled to conversion in 1972 at the higher rate of ¥360.Japanese government intervention in the currency market
In the 1970s, the Japanese government and business people were concerned that a rise in the value of the yen would hurt export growth by making Japanese products less competitive and would damage the industrial base. The government, therefore, continued to intervene heavily in foreign-exchange markets, even after the 1973 decision to allow the yen to float.Despite intervention, market pressures caused the yen to continue climbing in value, peaking temporarily at an average of ¥271 per US$ 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 per US$ to ¥300 per US$ 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 per US$ by 1980.