Japanese Yen (JPY)

It s the official currency of Japan and is commonly used globally as a fourth reserve currency, following the U.S. dollar, the euro, and the British pound. 

Author: Rohan Sajan
Rohan Sajan
Rohan Sajan
Hi, I've done my schooling in Dubai, and transferred to India for my undergrad at Mahatma Gandhi University. I'm a Bachelors of Commerce (Finance and Taxation) graduate. I'm currently working as an FP&A Executive at Rebel Foods.
Reviewed By: Rohan Arora
Rohan Arora
Rohan Arora
Investment Banking | Private Equity

Mr. Arora is an experienced private equity investment professional, with experience working across multiple markets. Rohan has a focus in particular on consumer and business services transactions and operational growth. Rohan has also worked at Evercore, where he also spent time in private equity advisory.

Rohan holds a BA (Hons., Scholar) in Economics and Management from Oxford University.

Last Updated:December 29, 2023

What is the Japanese Yen (JPY)?

The yen (¥) is the official currency of Japan. It is commonly used globally as a fourth reserve currency, following the U.S. dollar, the euro, and the British pound. In the foreign exchange market, it is one of the top three traded currencies.

Only the Bank of Japan (BoJ) has the authority to produce banknotes and coins. Banknotes come in values ranging from 1,000 to 10,000 yen. On the front of each note is a portrait of an influential figure in Japanese culture.

Despite suffering significant damage during World War II, Japan saw an economic miracle in the second half of the 20th century when the yen ascended to become one of the top world currencies, competing with the pound sterling and the dollar on international markets.

The 10,000 yen banknote has a projected lifespan of 4 to 5 years. However, because they are used more frequently, the lifespan of the 1,000 and 5,000 yen banknotes is only one to two years.

A new banknote with the denomination of 2,000 was released in 2000 to commemorate the Okinawa Summit. Interestingly, there aren't many of these banknotes in use today, mainly because most vending machines in Japan do not accept them.

The lengthy history of zero interest rates is the most significant feature of the Japanese Yen. Japan was the first to propose zero interest rates more than 20 years ago. Currently, interest rates are at, very close to, or even below zero in a few nations.

Due to the meager cost of borrowing in yen, it is a desirable method of financing currency purchases, which finance investments with higher interest rates and yields. It significantly contributed to the Great Recession of 2007–2008.

History of the Japanese Yen (JPY)

The Spanish-American silver dollar was the primary medium of exchange for goods internationally between Spanish America and Asia from the 16th to the 19th centuries. In the 19th century, these dollars were replaced by identically printed pesos.

The peso was inspired by the newly independent Latin American countries, with the Mexican peso being the most widely used. The British province of Hong Kong attempted to create its silver dollar from 1866 to 1869. 

The Hong Kong government ceased making these coins and sold the minting machinery to Japan because the Chinese were sluggish to adopt the new coinage and preferred the well-known Mexican dollars.

The yen, which was first issued in 1869 following the Meiji Restoration, was formally approved as the fundamental currency in the monetary reform of 1871.

 The yen was first established at parity with the Spanish and Mexican dollars and then used throughout the 19th century at 24g of fine silver. 

Still, in light of suggestions to put the currency on the monetary standard, it was defined as 1.5g of fine gold. The exchange of clan notes and paper money, which feudal lords had been issuing and circulating since the late 16th century, was put on hold by the government that year.

The adoption of the yen (1,圓), sen (1⁄100, 錢), and rin (1⁄1000, 厘) led to a decimal accounting system with round coins made with Western equipment imported from Hong Kong. Starting in July of that year, the new currency was progressively adopted.

The Japanese yen was formally adopted by the Meiji administration in 1871, replacing the mon currency system of the Tokugawa era, as part of the New Currency Act, which was passed to address the country's financial problems.

The Bank of Japan was founded in 1882 to manage the money supply. Japan adopted the gold standard in 1897.

As a result of the yen losing most of its value, the yen's fixed exchange rate was established following World War II, which was set at 360 JPY per 1 USD to rebuild the Japanese economy.

The yen was converted to a floating currency in 1973.

Denominations of JPY

The Bank of Japan, Japan's central bank, released the most recent series of Japanese yen banknotes in 2004 in four different denominations: ¥1,000, ¥2,000, ¥5,000, and ¥10,000.

There are six different yen coin denominations available: ¥1, ¥5, ¥10, ¥50, ¥100, and ¥500.

Several banknotes are included in the Japanese yen monetary system. Banknotes were established in 1872 and are still in use today. Japanese banknotes now come in denominations ranging from 0.05 yen to 10,000 yen.

The characters and denominations of the Japanese yen banknotes have changed over several series throughout history. Series A, the first set of letters to be used as a code, was developed and put to use in 1946. The values in Series A were ¥0.05, ¥0.1, ¥1, ¥5, ¥10, and ¥100.

By 2024, some Japanese yen currency denominations will undergo a makeover. Eiichi Shibusawa, a Japanese industrialist regarded as the "founder of Japanese capitalism" during the late 19th and early 20th centuries, will be shown on the new 10,000 yen note. 

Umeko Tsuda, who established Tsuda University in Tokyo and pioneered women's higher education, will be featured on the 5,000 yen note. The new 1,000 yen note will feature Shibasaburo Kitasato's likeness as a medical researcher. 

Baron Kitasato Shibasaburo was a bacteriologist and doctor from Japan. He is recognized for discovering the bubonic plague infectious agent in Hong Kong during an epidemic in 1894.

Series E, which debuted in 2004, is the newest series. This series has three books: ¥1000, ¥5000, and ¥10,000, all of which include human characters. The new currency will feature 3D holograms. 

Overview of Japan’s Economy

The world's foreign exchange market causes daily fluctuations in exchange rates between the Japanese yen and the dollar. Currently, approximately 120 to 150 yen is equal to 1 U.S. dollar.

  • Japan has a free-market economy, with the service sector making up over 69 percent of the country's GDP.
  • Japan had the third-largest nominal GDP in the world in 2020; the GDP of the nation was predicted to be just over U.S. $5 trillion.
  • When it comes to having the greatest foreign exchange reserves, Japan comes in second place with U.S. $1.3 trillion worth of holdings.
  • The nation was the fourth-largest exporter and importer in the world in 2018.
  • The largest and most advanced producers of automobiles, electronics, machinery, steel and nonferrous metals, ships, chemicals, textiles, and processed foods are found in Japan. 
  • Japan has a robust industrial base as well.
  • Thirteen percent of the land is used for agricultural purposes. At the same time, Japan, second only to China in terms of fish harvest, is responsible for approximately 15 percent of the world's catch.
  • According to global market capitalization, the Japan Exchange Group is the third-largest stock exchange.
  • When things are uncertain, the value of the Japanese yen frequently increases. Investors, therefore, consider the yen as a haven currency.
  • The aging and shrinking population of Japan, which reached a peak of 128 million in 2010 and is projected to drop to 125.9 million in 2020, is one of the country's most significant economic challenges today.

Overview of the Japanese Yen

The yen is one of the top seven currencies in international trade and forex trading, accounting for 83% of the market. Japan has one of the largest economies in the world and is one of the top dollar exporters, thanks to its GDP being among the highest of any nation.

Central banks each support their significant currencies on the currency market. It is the Bank of Japan (BOJ) in the case of the Japanese yen. The BOJ, like most central banks in industrialized nations, is required to act in a way that promotes growth and reduces inflation.

Yen traders need to be aware of several distinct and peculiar characteristics of the Japanese economy. First, despite its size, Japan hasn't grown much since its real estate bubble burst in 1990. Because of this, writers refer to the succeeding years in Japan as a "lost decade."

Since then, Japan's growth was generally below 2% between 2001 and 2011, and it decreased by 29% from 2012 to 2015. Japan is known for its low inflation levels; in fact, the country has experienced deflation for most of the last 20 years.

The BOJ has adopted a policy of meager rates in the instance of Japan in an attempt to boost demand and economic growth, even though deflation has been a persistent danger there for many years. At specific points in the 2010s, real rates in Japan were slightly negative.

Japan has one of the lowest fertility rates in the world and is also one of the oldest significant economies. That reflects an aging workforce with a decreasing number of young people to stimulate the economy through taxes and spending.

As a result, Japan, which had previously been relatively opposed to immigration, has recently opened its borders to foreign workers to help with labor shortages. Last but not least, Japan has a developed economy and a skilled labor force. 

Japan continues to be a top producer of consumer electronics, automobiles, and technology components even though some industries, like shipbuilding, have moved to nations like South Korea and China. Japan is now significantly exposed to the global economy as a result.

Why is the Yen Weak?

The key reason the yen fell below 140 per dollar for the first time in more than 25 years is that Japan's central bank is maintaining low interest rates while the Federal Reserve and other central banks are hiking rates excessively.

The Bank of Japan thinks more has to be done to get consumers and businesses to think about inflation after years of deflation. This is because the price rise in Japan is far slower than in the U.S.

The massive yen decline has affected the economy, businesses, and consumers differently. Due to the size of this loss, policymakers are discussing whether to intervene in the currency market or alter BOJ policy.

The underlying reason is that as U.S. interest rates climb and Japanese rates remain low, investors are more lured to assets denominated in dollars. The 10-year yield on Japan's government bonds is still capped at 0.25%, while the rate on treasuries has increased.

The yen is falling due to Japan's continued trade deficit and the country's still shaky economic recovery. Haruhiko Kuroda, the governor of the BOJ, has declared to stop paying support expenses because the battle against deflation is still being fought.

Inflation has exceeded the BOJ's 2% target, but the bank still views the trajectory as unstable and predicts a decline in inflation starting in April 2023. Kuroda asserts that steady inflation requires more significant pay increases.

Kuroda voiced concern over the abrupt decline in the yen value, but he clarified that the BOJ would not change its course of action. Japan's trade balance affects both foreign exchange rates and BoJ policy.

Japan has experienced significant trade surpluses, but it also has a huge public debt and an aging population. However, most of that debt is held domestically, and Japanese investors seem to be fine with low rates of return.

Volatility of JPY

Most of Japan's energy needs, including its oil, are imported. It is not surprising that the yen may be particularly sensitive to movements in commodity prices. The increased volatility of the yen is evident between the exchange rates and the cost of crude oil.

Following the devastating Tohoku earthquake in 2011, the tsunami, and the subsequent nuclear plant meltdown at Fukushima, Japan's reliance on fossil fuels as an energy source has substantially increased. 

The availability of less expensive crude oil has thus been welcomed for Japan's economic stability. In 2015, the yen rose 1.2% against the U.S. dollar and 6% against the euro as crude oil fell 4% to a level close to a five-year low.

According to this reliance, there is a negative relationship between the yen and the price of crude oil futures. This means that if the price of crude oil declines, it makes sense to expect the yen to rise in value.

As said before, historical performance is no guarantee of future results. Still, on December 15, 2015, the yen enjoyed significant gains during a time in which WTI crude oil futures saw a sharp decline from U.S. $100 per barrel in August 2014 to U.S. $50 per barrel in January 2015. 

Researched and authored by Rohan Joseph Sajan | LinkedIn 

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