Japanese yen

• 1. Introduction

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  The Japanese yen stands today as the third-most traded currency on earth, trailing only the US dollar and the euro. Yet the road to that position was anything but smooth. In its earliest form, the yen was pegged to a precise weight of metal: 1.5 grams of gold, or 24.26 grams of silver. Within a century it would swing from a wartime low of ¥600 per US dollar to a peacetime high of fewer than 80 yen per dollar. How did a currency born from the chaos of a feudal system become one of the world's great reserve currencies? And why, after decades of quiet strength, did it begin sliding to historic lows that alarmed economists and finance ministers alike? Those are the questions this documentary sets out to answer.

• 2. A Name and Its Origins

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  The word yen traces back through multiple languages before arriving in English in its current form. The Chinese had long traded silver by weight in forms called sycees. When Spanish and Mexican silver coins arrived via the Philippines, the Chinese named them "silver rounds" for their circular shape, using the characters pronounced yínyuán. Those coins, and that name, crossed into Japan as well.

  Walter Henry Medhurst, who had never visited Japan nor met any Japanese people, produced An English and Japanese, and Japanese and English Vocabulary in 1830, consulting mainly a Japanese-Dutch dictionary. He spelled certain words with "ye" rather than "e". The US physician and translator James Curtis Hepburn followed Medhurst's approach in his 1867 dictionary, the first full-scale Japanese-English and English-Japanese dictionary, spelling all "e" sounds as "ye". That work had a strong influence on Westerners in Japan, and the spelling "yen" is believed to have first appeared in its 1872 second edition. By the third edition in 1886, Hepburn had revised most "ye" spellings back to "e" to reflect contemporary pronunciation, but he kept "yen" as it was.

• 3. Building a Modern Currency

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  When the Meiji Restoration swept away the Edo Shogunate, Japan's monetary system remained a patchwork. The gold-counting economy of eastern Japan and the silver-weighing economy of the west were not unified, and that division allowed a large amount of gold to drain overseas at the end of the Tokugawa period. Emperor Meiji responded by appointing Okuma Shigenobu to lead monetary reform. Working alongside Inoue Kaoru, Ito Hirobumi, and Shibusawa Eiichi, Okuma proposed making coins circular rather than square and collapsing the old currency names, ryo, bu, and shu, into a single unit: the yen.

  The first gold yen coins struck for the Japanese government were minted at the San Francisco Mint in 1870, since a new facility at Osaka was not yet ready to handle gold bullion. On the 27th of June 1871, the Meiji government formally adopted the yen as Japan's official currency, with decimal divisions of 100 sen and 1,000 rin. Paper currency followed in 1872, with Meiji Tsuho notes engraved by Italian engraver Edoardo Chiossone, in denominations ranging from 1 to 100 yen.

  The system faced its first major stress almost immediately. Massive inflation from the Satsuma Rebellion in 1877 flooded the economy with non-redeemable banknotes. Prime minister Matsukata Masayoshi suspended the issuance of national fiat banknotes in 1880, and the Bank of Japan began operations on the 10th of October 1882 with the authority to print notes exchangeable for the old government and national bank notes. By 1899, Japan had adopted a gold exchange standard, defining the yen as 0.75 grams of fine gold.

• 4. War, Occupation, and the Fixed Rate

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  Japan left the gold standard in December 1931, and within months the yen had fallen to US$0.30 by July 1932 and further to US$0.20 by 1933. The currency stabilized around US$0.30 until the start of the Pacific War on the 7th of December 1941. What followed was financial devastation.

  No true exchange rate existed for the yen between the 7th of December 1941 and the 25th of April 1949. Wartime currency overprinting to fund military operations, and then postwar printing to fund reconstruction, pushed the rate to ¥600 per US dollar by 1947. When US forces under MacArthur entered Japan in 1945, they set an official conversion rate of ¥15 per dollar; within months, ongoing inflation collapsed that rate to ¥50, then ¥66, then further still.

  Stability came on the 25th of April 1949, when the US occupation government fixed the yen at ¥360 per dollar as part of the broader Bretton Woods system. That rate held for more than two decades. The arrangement finally broke apart in 1971 when the United States abandoned the gold standard in what became known as the Nixon shock. A brief successor agreement, the Smithsonian Agreement, set a new rate of ¥308 per dollar, but market pressures made even that impossible to sustain. In February 1973, the major nations allowed their currencies to float freely.

• 5. The Plaza Accord and the Yen's Rise

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  By 1971, Japan's current account had shifted from the deficits of the early 1960s to a surplus that the United States considered dangerously large. The belief that the yen was undervalued drove Washington's decision to devalue the dollar that summer. Even after the shift to floating rates in 1973, the yen briefly peaked at an average of ¥271 per dollar before the 1973 oil crisis sent it back down to a range of ¥290 to ¥300 between 1974 and 1976. The re-emergence of trade surpluses pushed it back up to ¥211 in 1978, only for the second oil shock of 1979 to send it to ¥227 by 1980.

  During the first half of the 1980s, despite growing trade surpluses, the yen weakened. Its average value fell from ¥221 per dollar in 1981 to ¥239 in 1985. The cause was a wide differential in interest rates, with US rates far higher than Japan's, combined with moves to deregulate the flow of capital. Japanese investors borrowed yen cheaply and converted them into dollars to invest abroad, flooding markets with yen supply.

  The turning point came in 1985 when finance officials from major nations signed the Plaza Accord, acknowledging that the dollar was overvalued and the yen undervalued. The yen responded dramatically. From ¥239 per dollar in 1985, it rose to a peak of ¥128 in 1988, nearly doubling its value. By April 1995 it had climbed to fewer than 80 yen per dollar, a level at which Japan's economy was temporarily nearly the size of that of the United States.

• 6. The Long Slide and Modern Crises

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  The asset price bubble years brought a reversal, and the yen fell to a low of ¥134 per dollar in February 2002. Japan's central bank kept interest rates near zero to encourage domestic spending, but the effect was to make the yen an attractive currency to borrow cheap and convert into higher-yielding assets abroad, a practice known as the carry trade. By February 2007, one publication estimated the yen was 15% undervalued against the dollar and as much as 40% undervalued against the euro; the total carry trade was estimated at US$1 trillion.

  The global economic crisis of 2008 briefly reversed that slide, as investors fled riskier assets and yen demand spiked. Then, on the 4th of April 2013, the Bank of Japan announced it would expand its asset purchase program by US$1.4 trillion over two years, aiming to lift the country from deflation to a 2% inflation target. Critics worried the program amounted to a deliberate devaluation that would raise import prices, particularly for energy and raw materials.

  From 2022 onward, a new and severe depreciation took hold. Japan maintained ultra-low interest rates to fight domestic deflation while the United States raised rates sharply to combat domestic inflation. That differential pushed investors toward the dollar and away from the yen. By July 2024, the yen had fallen to above ¥161 per dollar, its lowest nominal effective exchange rate in 37.5 years, and its lowest real effective exchange rate since the Bank of Japan began tracking the data in 1970. The Bank of Japan conducted currency interventions totaling more than ¥9 trillion, selling dollars and buying yen, in the September-October 2022 and April-May 2024 periods.

• 7. Coins, Notes, and Everyday Money

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  Japanese coins carry a detail that surprises many visitors: the year stamped on each coin does not follow the Gregorian calendar. Instead, it records the regnal year of the reigning emperor. A coin minted in 1980 bears the inscription Showa 55, the 55th year of Emperor Showa's reign. The first coins of the current Reiwa era were minted in July 2019. Imperial portraits have never appeared on Japanese coins, because the image of the emperor is considered sacred.

  The 500-yen coin, first issued in cupronickel in 1982, is among the highest-valued coins in regular circulation anywhere in the world. Because of its high face value, it became a favorite target for counterfeiters. A second version with added security features was released in 2000, and continued counterfeiting forced a third version with further improvements in 2021, this time in a bi-metallic construction.

  Banknotes have carried their own notable figures. The Series F notes issued on the 3rd of July 2024 were announced five years earlier by Finance Minister Taro Aso. The ¥10,000 note features Shibusawa Eiichi, who had been one of the architects of Japan's original monetary reform in the 1870s, alongside an image of Tokyo Station. The ¥1,000 note features Kitasato Shibasaburo alongside The Great Wave off Kanagawa from Hokusai's Thirty-six Views of Mount Fuji series. Portraits are drawn from the Meiji period and later because a precise photograph makes forgery harder than replicating a painting. Japan remains a notably cash-reliant society; in 2014, cash accounted for 38% of all payments in the country.