Encyclopedia of Money: Yen

The yen is the money of account for Japan, comparable to the dollar for the United States. By the 1990s the Japanese yen had become a major international currency, sharing the stage with the U.S. dollar, the German mark, and the ECU as determinants of international monetary values.

The Shinka Jorei (New Currency Regulations) of 1871 established the yen as the monetary unit in Japan. The Japanese derived the word yen from the Chinese word yuan, which meant “round thing,” a reference to the U.S. and Mexican dollars that dominated East Asian trade at the time. The act set the yen equal to 0.05 ounces of gold, making the official Japanese price of an ounce of gold equal to 20 yen. At the time the official United States price of an ounce of gold was $20.67. The yen was intended to be equivalent to the Mexican dollar, the standard unit in Asian trade at the time. The yen began life as a decimalized currency; one-one-hundredth of a yen was called a sen, and one-tenth of a sen was called a rin.

Officially, Japan was on a bimetallic monetary system, but in practice the yen was on a silver standard. In 1877 a civil rebellion forced the government to issue inconvertible paper money to finance military expenditures. Inflation erupted and in 1882 the government established the Bank of Japan, partly to replace inconvertible paper money with bank notes convertible into silver. Following the Sino-Japanese war of 1894–1895, Japanese received in gold a large war reparation payment from China, providing a gold reserve sufficient for Japan to establish a gold standard. In 1887 a new currency law gave the Bank of Japan a monopoly on the privilege to issue bank notes, and put the yen on the gold standard.

At the beginning of World War I most developed countries, including Japan, abandoned the gold standard and prohibited the export of gold. Following World War I Japan, beset by economic turmoil, stumbled in its efforts to return to the gold standard. In 1930, on the eve of the Great Depression, Japan returned to the gold standard, only to have to abandon it again in 1931. The depression dealt a serious blow to the gold standard worldwide, and Japan turned to tight government regulation of its currency, which continued through World War II.

A wave of inflation engulfed Japan following World War II and the occupation authorities instituted a currency reform that withdrew old yen notes and issued new yen notes. In 1949 the exchange rate between the yen and the dollar was set at 360 yen per dollar. Under the Bretton Woods system, exchange rates were fixed at official rates, and the ratio of yen to dollars remained at 360 until 1971. Large trade surpluses enabled Japan to bolster its gold and foreign exchange reserves, paving the way for lifting all restrictions on foreign exchange transactions.

When a system of floating international exchange rates displaced the fixed-rate Bretton Woods system in 1973, the yen began an upward career of currency appreciation. In 1970 it had taken 360 yen to purchase a dollar. By 1973 it took only 272 yen, and by the end of the decade it took only 219 yen to purchase a dollar. As the yen grew stronger, it took more dollars to purchase a yen, but despite that Japanese goods constituted a major competitive threat to U.S. industries. In 1984 the world’s major trading partners agreed to intervene collectively in foreign exchange markets to appreciate the yen even further. Whereas it took 239 yen to purchase a dollar in 1985, by 1988 that number had fallen to 128 yen, a substantial increase in the value of the yen.

In the 1980s Japan took further steps to deregulate its financial system and to allow foreign firms to participate in Japan’s financial markets. Japanese banks had become among the largest and most powerful in the world, and the yen emerged as a major international currency. By 1998 economic depression in Japan put downward pressure on the yen, and the yen traded at around 140 yen per dollar.