The Trading History of the Yen (USD/JPY)

The yen – translated from Japanese as “round object” – has been the currency unit of Japan since 1870. The international symbol for the yen is ¥. The currency was first introduced in Japan with the minting of modern round coins in both silver and gold.

In addition to the euro and the dollar, the yen is part of many countries’ own money reserves and serves to stabilize the currency. It is divided into Sen (1 Yen = 100 Sen) and Rin (1 Sen = 10 Rin). Both units initially existed as coins, but were withdrawn from circulation in 1954. Nowadays they have only arithmetical meaning. The ISO code is JPY.

After the end of the Second World War, the yen was pegged to the US dollar. However, after the Bretton Woods system collapsed in 1973, it was released for the currency market and has been determined by it ever since.

Pronunciation and etymology
In modern Japan, the yen is basically pronounced en. Only some regions have retained the pronunciation of en. The latter has also established itself in Europe, based on the Japanese and English dictionary of the American missionary and linguist James Curtis Hepburn. Although in the 3rd edition of the Hepburn dictionary all ye’s were replaced by e to reflect the contemporary pronunciation, the yen was excluded from this update, as it was probably already firmly established in this form.

History – Introduction of the Yen

The yen was introduced as currency by the Meiji government in 1871. The first currency reform in the same year established the use of the decimal system, according to which 1 Yen is divided into 100 Sen or 1000 Rin. The new Japanese currency was initially based on the gold and silver standard, with silver coins being introduced to facilitate trade with Pacific Ocean countries that had also adopted the silver standard. The richer countries, such as the United States and some European countries, switched to the gold standard in 1871. In the same year, a gold yen coin was minted for the first time, which was intended exclusively for national trade. The round form of the Yen coin was oriented towards Western currencies.

The Yen becomes an internationally traded currency

The Yen has not always been one of the strongest world currencies. Although the gold currency was introduced in Japan in 1897, it had to be abandoned during the First World War. The attempt to return to the gold currency in 1930 failed due to the stock market crash in 1929. Finally, the gold standard was completely abolished in 1931.

After the Second World War, the Japanese currency was subject to a strong inflationary process for several years, but was brought back into balance with stabilisation measures. In order for the yen to be able to act as a means of payment in the international arena, it was aimed at making it convertible. Convertibility is achieved when the currency can be exchanged for other currencies without limit.

In 1964, the yen acquired convertibility, but in the first years of exchangeability it was hardly noticed internationally. The reasons given for this are the rigid form of organisation and the almost complete separation of the monetary and credit system from foreign countries.

At the beginning of the 1970s, foreign currencies had to be resold to foreign trade banks, postal savings banks or money dealers until one month after purchase at the latest. They could also be used for foreign travel or private money transfers. Moreover, foreign exchange operations were limited to certain prescribed currencies. In May 1971 these included

  • the Australian, the Canadian and the US dollar,
  • the Deutsche Mark,
  • the Austrian schilling,
  • Pound sterling,
  • the Dutch guilder,
  • the Belgian and French francs, and
  • the Swiss franc, furthermore
  • the Danish, Norwegian and Swedish crowns,
  • Italian lira and
  • the Portuguese escudo.

However, at the beginning of the 1980s, Japan caught up significantly as an economic and financial power and thus made the leap into the international arena. Thanks to a number of events and measures, the yen became a currency to be taken seriously worldwide. Firstly, the accumulation of large currency reserves played a role in this, providing Japan with the necessary manoeuvring mass for foreign activities. On the other hand, Japanese financial capital also gained a foothold in foreign financial markets, which led to the expansion of a broad network of foreign branches of Japanese banks. Between 1970 and 1983, the number of foreign departments, branches and representative offices of Japanese banks rose from 85 to a remarkable 400.

Undervaluation of the Yen

Since the Japanese currency was still seriously undervalued in 1971 – which made Japanese exports very cheap on the international market, but imports from abroad expensive for the Japanese themselves – the United States decided to intervene.

Cautious tactics of Japanese monetary authorities

Even though Japan was now an economic and financial power, the Yen’s positioning within the international monetary system did not yet fit this role. This was partly due to the cautious and restrained behaviour of Japanese monetary authorities. Only under pressure did they declare themselves willing to take opening measures. In addition, the Japanese interest rate level was very low, which is why a strong outflow of capital was feared.

Bretton Woods Agreement

The Bretton Woods Agreement was an attempt to restructure the international monetary system of fixed exchange rates after World War II, with the gold-backed US dollar as the reserve currency. The American central bank undertook to exchange the US dollar for gold at any time. The agreement was based on the intention to stabilise the exchange rates between the currencies.

As long as the dollar was in global short supply due to the large foreign trade surpluses in the United States, the Bretton Woods Agreement fulfilled its purpose. However, the more dollars circulated outside the country, the more the gold cover fell, which in turn carried an inflation risk.

Therefore, it was primarily the United States that wanted to see the yen appreciate as they wanted to maintain the gold parity of their currency. However, the Japanese government refused to do so because of Japan’s low currency reserves.

Thus, the yen exchange rate was fixed until 1971, when the United States finally had to abandon the gold standard. After the end of the Second World War, a lot of credits flowed from the United States to Europe to rebuild the world economy. The resulting drastic devaluation of the dollar caused the system of fixed exchange rates to collapse and forced the United States to abandon the gold standard as there were no longer sufficient gold reserves. 1973 marked the end of the Bretton Woods Agreement. As a result, exchange rates were liberalised in most states.

The Yen in the foreign exchange market

How an exchange rate develops depends on many factors. In principle, however, the development of the currency goes hand in hand with the overall economic development of the country concerned. The exchange rate of the currency is virtually the mirror image of this.

In the 1970s, business people and the government feared that the rise in value of the yen would have a negative impact on export growth and that Japanese products would lose their competitiveness. For this reason, the Japanese government continually intervened in the foreign exchange market by buying and selling the US dollar. Nevertheless, the yen continued to rise until it peaked at 271 yen to the US dollar. With the 1973 oil crisis, the devaluation of the currency came to 290 to 300 yen per US dollar. Only the trade surpluses revalued the exchange rate to 211 Yen in 1978. But this strengthening of the currency was cancelled out by the subsequent oil crisis of 1979.

The Yen in the 1980s

Despite a good trade balance, the yen failed to appreciate in the first half of the 1980s. However, as the trade balance grew steadily, the yen was in greater demand on the foreign exchange market than ever before. In addition, the large interest rate differential between the US and Japan – the US had very high interest rates compared to Japan – led to a huge outflow of capital from Japan, which led to a significant increase in the supply of yen in the foreign exchange markets.

Effects of the Plaza Agreement

In 1985 representatives of the G-5 countries France, Great Britain, West Germany, USA and Japan adopted the “Plaza Agreement” at the Plaza Hotel in New York. This provided for a devaluation of the dollar against the yen. In the following two years, the yen almost doubled in value against the US dollar, reaching a peak of 128 yen to the US dollar in 1988. However, the appreciation got so strong that it could no longer be stopped. As a result, Japan soon found itself in the middle of a bubble economy. The bubble finally burst in 1990, which had serious consequences for the economy: insurers and large banks filed for bankruptcy, and the stock and real estate markets lost significant value. But by 1995, the currency had already reached a new high of 80 yen per US dollar.

Japan’s aggressive monetary policy and economic stimulus package 2013

Japan is now the third largest economy in the world. Due to the high dependence on exports, economic growth is below average and also has deflationary tendencies. As early as January 2013, Japan’s Prime Minister Shinzo Abe announced an ambitious economic stimulus plan, under which the equivalent of 169 billion euros were to be invested in the economy immediately. This high volume was achieved thanks to the Bank of Japan’s extremely low key interest rate.

The central bankers as well as the G-7 governments have called this course of action a currency war – an “aggressive monetary policy” of the Bank of Japan that leads to a strong and rapid devaluation of the yen.

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Coins

In 1870 the coins were introduced in Japan. There were silver coins at 5, 10, 20, 50 Sen and 1 Yen, as well as gold coins in the designs 2, 5, 10 and 20 Yen. The gold 1 Yen coin came into circulation in 1871. In 1873 copper coins were also issued in the value of 1 Rin, ½, 1 and 2 Sen. In 1889 the copper-nickel coin was issued for 5 sen. In 1897 the silver 1 Yen coin was withdrawn from circulation and the sizes of the gold coins were reduced by 50%.

In 1920 a copper-nickel coin was introduced in the value of 20 Sen. The production of silver coins was stopped in 1938. Instead of silver, base metal mixtures were used during the Second World War to produce 1, 5 and 10 Sen coins. In 1945, 5 and 10 Sen coins were even made of clay, but they never came into circulation. In the post-war period, the 1, 5 and 50 yen coins were made of brass and introduced between 1946 and 1948. Today’s 5-yen coin with the hole in the centre of the coin came into circulation in 1949. A 10-yen bronze coin followed in 1951, which is still valid today.

Coins with a face value of less than 1 yen lost their validity at the end of 1953.

Apart from the Swiss 5-franc coin, the most valuable coin in circulation is the 500-yen coin. It is worth about 3.92 euros. Because of its value it is very popular with coin counterfeiters. In response to this, a new coin with security features was issued in 2000, but this did not change anything about new counterfeits.

It is interesting to note that the yen shows the year of the current imperial rule and not, as on the coins of other countries, the year of issue according to the Gregorian calendar. A coin minted in 2009 with the example date “Heisei 21” thus refers to the 21st year of the reign of Emperor Akihito.

The coins can be easily distinguished from those with impaired vision.

Banknotes

The very first yen banknotes were printed in 1872 at the C. Naumann printing works in Frankfurt am Main. This was the case until the establishment of the Central Bank of Japan in 1882, which since then has had the exclusive right to issue banknotes.

The current banknotes, also known as the E series, came into circulation on November 1, 2004 and consist of 1,000 Yen, 2,000 Yen, 5,000 Yen and 10,000 Yen. The 2000-yen banknote is rarely seen.

Counterfeits

While the appearance of the yen coins has remained more or less the same over time, new designs of banknotes have been issued. The reason for this was that the yen notes of the time were relatively easy to counterfeit. Finally, in 2004, a new E-series of yen banknotes was released, which is considered by experts to be extremely counterfeit-proof. Although the counterfeiting rate has fallen sharply since then, Japanese banknotes are still among the most counterfeited in the world.

Thanks to the newly added security features, the banknotes are easy for visually impaired people to distinguish by touch. Previously, it was only possible to distinguish between values in coins.

Yen as reserve currency

A currency that can be used internationally because of its strength and interchangeability is traded by foreign central banks as a reserve currency. Currency reserves serve the worldwide liquidity of a state. The yen reached the status of such a reserve currency in the 1980s. Today, it is the third most important reserve currency in the world.

Yen inflation rate in direct comparison to the US dollar

After prices skyrocketed in the mid-1980s, Japan began to pursue a strict anti-inflationary policy and managed to push the inflation rate back below that of the USA. While the annual inflation rate in the United States was 4.7% between 1979 and 1993, Japan’s inflation rate over the same period was significantly lower at around 2.3% per annum.


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