Japanese Yen-JPY

The Japanese yen is the legal tender of Japan. Its code in financial markets is JPY and the symbol used to denote the yen is ¥. The Japanese yen is one of the most traded currencies in the foreign exchange market following the U.S. dollar and euro and pound sterling.

Since it is usual when counting in East Asia, huge amounts of yen are also counted in multiples of 10,000, just like in western counting methods where large sum are often expressed in thousands.

The Pronunciation and etymology of Japanese yen

In Japanese, the yen is pronounced as “en”. In the beginning, Chinese had traded silver in huge quantities and when Spanish and Mexican silver coins arrived, they called them (silver round) for their spherical shapes.  The coins and the name also emerged in Japan. Both spelling and pronunciation “yen” is normal in English. This is because most English speakers who visited Japan at the end of the Edo period to the early Meiji period spelled words this way.

Introduction of the yen

Earlier in the 19th century silver Spanish dollar coins were extensively circulated throughout Southeast Asia, the China coast, and Japan. These coins were being introduced through Manila over a period of two hundred and fifty years, arriving in huge quantities on ships from Acapulco in Mexico. These ships were known as the Manila galleons. During the 19th century these silver dollar coins were in effect Spanish dollars minted in the “new world”, mainly at Mexico City.  But after the 1840s these coins were more and more replaced by silver dollars made new Latin American republics. Subsequently in the latter half of the 19th century some indigenous coins in the region were designed, having similarities with the Mexican peso. The earliest introduction of these local silver coins was known as the Hong Kong silver dollar coin which was minted in Hong Kong between the years 1866 and 1868.

Since the Chinese were slow to acknowledge a new coinage and preferred the common Mexican dollars, and so the Hong Kong government stopped minting these coins and sold the mint machinery to Japan.

The Japanese subsequently decided to introduce a silver dollar coinage, calling it as ‘yen’, meaning ‘a round object’.  On May 10, 1871, an act was signed by the Meiji Government and the yen was officially adopted in Japan.

The new currency was slowly introduced starting from July of that year. The yen was, as a result basically a dollar unit, like all dollars, descended from the Spanish Pieces of eight, and up until the year 1873. Throughout the world, during this period, all the dollars traded in approximately the same value.

The introduction of the yen marked the beginning of an end of Tokugawa coinage, a complex monetary system of the Edo period based on the mon.  Subsequently, a New Currency Act of 1871, stipulated the adoption of the decimal accounting system of yen with the coins having circular shape and manufactured using Western machinery.

In 1867, the European Congress of Economists, in Paris, legally defined the yen as 0.78 troy ounces (24.26 g) of pure silver, or 1.5 grams of pure gold, the 5-yen coin was equivalent to the Argentine 5 peso fuerte coin, thus placing it on a bimetallic standard. (The equivalent amount of silver is worth approximately 1181 modern yen, even as the same amount of gold is worth about 4715 yen.

After the silver devaluation of 1873, the yen devalued against the US dollar and the Canadian dollar units since they adopted a gold standard, and by the year 1897 the yen was valued only at about US$ 0.50. During that year, Japan started implementing a gold exchange standard as a result, fixed the value of the yen at $0.50.

Fixed value of the yen to the US dollar

At the time of the Second World War, the yen lost most of its value. Following a period of instability, in 1949, the value of the yen was set at ¥360 per US$ 1 through a United States plan, which was part of the Bretton Woods System, to bring stability in prices of the Japanese economy. The new exchange rate was kept until 1971, when the United States exited the gold standard, which had been a key element of the Bretton Woods System, and levied a 10 percent additional tax on imports, setting in motion changes that ultimately led to floating exchange rates in 1973. Since that period and 2012, the yen has turned out to be much stronger and the USD to JPY ratio is about ¥78 to the dollar.

Undervalued yen

In 1971, the yen was undervalued. Japanese exports were very cheap, costing too little in international markets, and imports from abroad were very expensive, costing the Japanese importers way too much. The evidence of currency being undervalued was reflected in the large 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. As the yen, and several other major currencies, were highly undervalued, United States decided to take some action in 1971.

Yen and major currencies float

Following the United States’ decision to cheapen the dollar in the summer of 1971, the Japanese government agreed to new, fixed exchange rate regimes, as part of the Smithsonian Agreement, signed at the end of the year. According to this new agreement, the exchange rate was set at ¥308 per US$1. However, the new fixed rates of the Smithsonian Agreement were not easy to maintain regardless of supply and demand pressures in the foreign-exchange market. In early 1973, the rates were discontinued, and the major traded currencies of the world allowed their adopted floating exchange rate system.

Japanese government intervention in the currency market

During the 1970s, Japanese government and business people were very worried that a increase in the value of the yen would harm export growth by making Japanese products less competitive and would shake the industrial base. The government consequently continued to intervene a great deal in foreign-exchange market (buying or selling dollars), even after the 1973 decision to let the yen to float.

Notwithstanding the intervention, market pressures caused the yen to continue to climb in value, shooting up temporarily at an average of ¥271 per US$1 in 1973 before the impact of the 1973 oil crisis emerged. The rising costs of imported oil resulted the yen to devalue to a range of ¥290 to ¥300 between 1974 and 1976. The huge turnaround in balance of payments was seen even as Japan’s trade surpluses drove the yen back up to ¥211 in 1978. This currency strengthening again took a sharp U-turn during the second oil shock in 1979, with the yen falling to ¥227 by 1980.

Yen in the early 1980s

In the first half of the 1980s, the yen was unsuccessful to rise in value even though current account surpluses returned and rose quickly. From ¥221 in 1981, the average value of the yen in fact slumped to ¥239 in 1985. The growth in the current account surplus resulted in stronger demand for yen in foreign-exchange markets; however this trade-related demand for yen was offset by other factors. A wide gap in interest rates, with United States offering much higher interest rates than those in Japan, and the constant moves to deregulate the international flow of capital, led to a large net outflow of capital from Japan. This capital flow boosted the supply of yen in foreign-exchange markets, as Japanese investors substituted their yen for other currencies (mainly dollars) to invest abroad. This kept the yen weak compared to the dollar and encouraged the swift rise in the Japanese trade surplus that took place in the 1980s.

Effect of the Plaza Accord

In 1985 a remarkable change occurred. Finance representatives from major nations signed an accord (the Plaza Accord) confirming that the dollar was overvalued (and, thus, the yen undervalued). Due to this agreement, and changing supply and demand pressures in the markets, a rapid rise in the value of the yen emerged.  While its average stood at ¥239 per US$1 in 1985, the yen climbed to a peak of ¥128 in 1988, almost doubling its value comparative to the dollar. After dropping in value somewhat in 1989 and 1990, it climbed a new high of ¥123 to US$1 on December 1992.  Then in April 1995, the yen touched a new peak of less than 80 yen per dollar, momentarily making Japan’s economy almost the size of the US.

Post-bubble years

The yen dropped sharply in value during the Japanese asset price bubble and continued to slide afterwards, hitting a low of ¥134 to US$1 in February 2002. The Bank of Japan’s policy to keep zero percent interest rates has discouraged yen investments. Accordingly, foreign exchange speculators have been involved in extensive carry trade – which is borrowing yen and investing in better-paying currencies (thereby further pushing down the yen). According to the Economist, dated February 2007, carry trade was estimated to be as large as $1 trillion. The study also showed that yen was 15% undervalued against the dollar, and as much as 40% undervalued against the euro

Post Global Economic Crisis of 2008

Nevertheless, this trend of depreciation upturned following the global economic crisis of 2008. Other major traded currencies except for the Swiss franc have been sliding relative to the yen.

Coins

In 1870, coins were introduced.  There were silver coins which included denominations such as 5, 10, 20 and 50 sen and 1 yen, and gold having denominations such as 2, 5, 10 and 20 yen. Gold 1 yen were launched in 1871; subsequently copper 1 rin, ½, 1 and 2 sen were introduced in 1873.

Then in 1987, Cupronickel 5 sen coins were introduced, the silver 1 yen coin was discontinued in the monetary system and the sizes of the gold coins were made smaller by 50%, even as 5, 10 and 20 yen coins were introduced. In 1920, cupro-nickel 10 sen coins were issued.

By 1938, the production of silver coins completely ended, after which a range of base metals were used to make 1, 5 and 10 sen coins during the Second World War. Although clay 5 and 10 sen coins were made in 194, they never came in the circulation.

After the end of the war, brass 50 sen, 1 and 5 yen were introduced between the period of 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 having denominations of less than 1 yen were abandoned from December 31, 1953, following implementation of the Small Currency Disposition and Fractional Rounding in Payments Act.

In 1955 the recent kind of aluminum 1 yen was issued, together with un-holed, nickel 50 yen. In 1957, Japan introduced silver 100 yen pieces. However, these coins were replaced in 1967 by the current, cupro-nickel type, alongside the holed 50 yen coin. Then in 1982 the first edition of 500 yen coins were introduced.

The design: the date which is expressed as the year in the reign of the emperor at the time the coin was stamped is on the reverse of all coins, and, in the majority of cases, country name and the value in kanji is on the obverse, with the exception of the present 5-yen coin where the country name is on the reverse.

As of April 2011 the 500 yen coin was the highest-valued coin to be circulated frequently in the world (depending on exchange rates, the very infrequently  used 5 Cuban convertible peso coin is sometimes the highest-valued), with value of above US$6. As the face value of this coin is so high, the 500 yen has been a favorite target for counterfeiters. These coins were counterfeited to such a large extent, that it forced Japanese authorities to issue new series of 500 yen coins in 2000.  These coins had several security features but the counterfeiting continued.

100% aluminum is used for making 1 yen coin and thus it is so light that it can float on water if placed correctly.

On numerous occasions, commemorative coins have been minted, often using gold and silver with face values as high as 100,000 yen.  The first of these additions were silver ¥100 and ¥1000 Summer Olympic coins, issued during 1964 games.

Lately this practice is carried out with the 500 yen coin, first in commemoration of the Nagano Olympic Games in 1998, and then the Aichi Expo in 2005.

The current commemorative 500 and 1000 yen coin series started to circulate in December, 2009, with 47 distinctive designs for each with only one available from banks in each territory. 100,000 coins of each design have been minted and they are all are (as of October, 2010) still obtainable in major banks at face value. If someone wants to collect one of each coin then he/she would need to invest 70,500 yen, thereby creating a major source of income for the Japanese government.

Although all commemorative coins can be used in the financial system, they are not found often in routine daily use and normally do not circulate.

While most nations’ coins display the CE year of mintage, yen coins display the year of the current emperor’s reign. For instance, a coin minted in 2009 would show the date Heisei21 (which implies the 21st year of Emperor Akihito’s reign)

Specification of coins

¥1: It has diameter of 20mm. Thickness of 1.2 mm. Mass is 1 g. 100% aluminum is used. The edge is very smooth. Its obverse has young tree, state title and value. Its reverse has the value and year of minting. These were first mined in 1955.

¥5: It has diameter of 22 mm. Thickness is 1.5 mm. the mass is 3.75 g. its composition is 60-70 copper and 30-40% zinc. It has smooth edge. The obverse side has Ear of rice, gear, water, and value. Its reverse side has state title and year of mining. This denomination was first minted in 1959.

¥10: It has a diameter of 23.55 mm. The thickness is 1.5 mm. the mass is 4.5 g. the composition is 95% copper, 3-4% zinc and 1-2 % tin. It has two types of edges: smooth and reeded. The obverse side has Hoodo Temple, Byodo-in, state title and value. The reverse side has evergreen tree, value and the year of mining. These coins were first mint on 1951 followed by another minting in 1959.

¥50: It has a diameter of 21 mm. It has thickness of 1.7 mm. The mass is 4 g. Its composition is Cupronickel: 75% copper and 25% nickel.  The edge is reeded. The obverse side has Chrysanthemum, state title and value. The reverse side has value and year of mining. These coins were first minted in 1967.

¥100: The diameter is 21mm. The thickness is 1.7mm. its mass is 4.8 g. It is composed of cupronickel: 75% copper and 25% nickel. The edge is reeded. The obverse side includes Cherry blossoms, state title and value. The reverse side includes value and the year of minting. The coins were first minted in 1967.

¥500: The diameter is 26.5 mm. The thickness is 2mm. The first edition was minted in 1982 (now no more in circulation). The edge was smooth with lettering (Nippon 500 Nippon 500). Its mass was 7.2 g. The composition was cupronickel: 75% copper and 25% nickel.  The obverse side had Paulownia state title and value. The reverse side had value, bamboo, mandarin, orange, year of minting.

The new edition was minted in 2000. Its dimension were same but mass was now 7 g. The composition was 72% copper, 20% zinc, and 8% nickel. The edge is reeded slantingly. The reverse and obverse sides are same the only difference being the reverse side has latent image.

Banknotes

In 1872, yen banknotes were issued in the financial system after being introduced two years beforehand.  Right through its history, the denominations of yen have ranged from 10 yen to 10000 yen.

Before and during World War II, a variety of bodies issued banknotes in yen, such as the Ministry of Finance and the Imperial Japanese National Bank. The Allied forces also circulated some notes soon after the war. Following War, the Bank of Japan has been the sole authority to issue banknotes. Since the end of the Second World War, The Bank of Japan has issued five series of banknotes that include; Series E, the current series, comprising of ¥1000, ¥2000, ¥5000, and ¥10,000. The ¥2000 bills are uncommon these days, and often not accepted as a means of payment, not even in dispensing machine.

Determinants of Value

Since December 1931, Japan slowly shifted from the gold standard system to the managed currency system.

The comparative 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 largely depends on the desire of yen holders to exchange their yen for other currencies to buy goods, services, or assets. The demand for the yen largely depends on the desire of foreigners to purchase goods and services in Japan and by their interest in investing in Japan (FDI or buying yen-denominated real and financial assets).

Since the 1990s, the Bank of Japan, the country’s central bank, has kept interest rates at very low levels (near zero levels), aimed at stimulating economic growth. Short-term lending rates have reacted to this monetary relaxation and over the years, (from 1993 to 2008) have fallen from 3.7% to 1.3% Low interest rates together with abundant liquidity for the yen prompted investors to borrow money in Japan and invest it in other countries (in finance this practice is called as carry trade). This has helped to maintain the value of the yen low relative to other currencies.

Special Drawings Rights Basket (SDR)

The special drawing rights (SDR) valuation is an IMF basket of currencies, which includes the Japanese yen.  As of 2011, the SDR was related to a basket of currencies with 41.9% for the dollar, 37.4% for the euro, 11.3% for the pound sterling, and 9.4% for the yen. The proportion for the yen has nevertheless declined from 18% in 2000. The exchange rate for the Japanese yen is denoted in terms of currency units per U.S. dollar; while other rates are expressed as U.S. dollars per currency unit. The SDR currency value is calculated on a daily basis and the valuation basket is appraised and adjusted every five years. The SDR was formed in 1969 to facilitate the fixed exchange system.

Historical Exchange Rates of Yen

The table below shows the monthly average of the yen/US Dollar spot rate at 17:00 JST.

Japan’s older currencies

Japanese mon

The mon  used to be the currency of Japan during the Muromachi period that stretched from 1336 to 1870. Coins denominated in mon were made from copper or iron and circulated together with silver and gold ingots denominated in shu, bu and ryō, with 4000 mon = 16 shu = 4 bu = 1 ryo. The yen then replaced these denominations in 1870. Still, its usage went on until 1871, and the first Japanese stamps, issued in that year, were denominated in mon.

Mon coins were holed, making it possible to string them together.

In 1695, the shogunate placed the Japanese alphabetical character gen on the obverse of copper coins.

All through the Japanese history, there were many varied styles of currency comprising of numerous shapes, styles, designs, sizes and materials, together with gold, silver, bronze, etc. Also, rice was once considered as currency, known as the koku.

Koban (Coins)

The koban was a Japanese oval gold coin during the Edo period in feudal Japan. The Koban was equal to one ryo, another old Japanese monetary unit. Koban was a central part of Tokugawa coinage.

The Keicho era koban, which was a gold piece, had about one ryo of gold, so that koban carried a face value of one ryo.

Ryo (Coin)

A ryo was a piece made from gold in pre-Meiji Japan. It was valued about sixty monme of silver or four kan (4,000 coins) of copper (the exchange rate fluctuated). It was ultimately replaced with a system based on the yen.

The ryo was initially a unit of weight from China, the tael.  Japan began to use it during the Kamakura period.  In the Azuchi-Momoyama period it had become nearly standardized throughout Japan, about 4.4 monme as a unit of weight (about the same as 16.5 g). The Keicho  koban, a gold piece, carried about one ryo of gold, so that koban had a face value of one ryo. Nevertheless, successive mintings of the koban had unreliable (usually diminishing) amounts of gold. As a result, the ryo as a unit of weight of gold and the ryo as the face value of the koban were no more synonymous.

An idea of the importance of the Ryo may be discerned from the famous Japanese motion picture “Yojimbo”, which is set in pre-Meiji Japan. In that movie, the central character, a solitary sammurai swordsman, played by actor Toshiro Mifune, is offered for his services the sum of 50 Ryo — and the movie’s dialogue makes obvious that 50 Ryo is a very great sum of money.

Wadokaichin

Wadokaichin also romanized as Wado-kaichin or called Wado-kaiho, is the earliest official Japanese coinage, having been minted at the beginning of 708 AD on order of Empress Gemmei

The coins, which were circular with a square hole in the center, stayed in circulation until 958 AD. These were the first of a array of coins collectively called junizeni or kocho junise.

“Wadokaichin” is the reading of the four letters printed over the coin, and is thought to be made of the metal name Wado or “Japanese copper”, which could otherwise mean “happiness”, and “Kaichin”. This coinage was inspired by the Tang coinage named Kaigentsuho (first minted in Chang’an in 621 CE. The Wadokaichin had the same specifications as the Chinese coin, with a diameter of 2.4 cm and a weight of 3.75 g.