Japanese yen

The Japanese yen is the official currency used in Japan. It is a major player in the global economy. In the foreign exchange market, it is the third-most traded currency. It follows only the United States dollar and the euro. Many nations also use the yen as a third reserve currency. A reserve currency is money that central banks hold to support their own economy and trade.

The yen operates on a decimal system for its smaller units. One yen is divided into 100 units called sen. These sen can be further divided into 1,000 rin. While these smaller units were removed from circulation in 1953, the decimal structure remains part of its history. Historically, the yen was defined by its relationship to gold or silver. Today, the yen is a floating currency. This means its value is determined by the market rather than being fixed to another asset.

Modernizing the yen required significant political reform during the Meiji era. Before 1871, Japan used many different types of money. This included the Tokugawa coinage and various paper currencies called hansatsu. These were issued by local feudal fiefs known as han. Because different regions used different systems, the economy faced great turmoil. The gold and silver systems in eastern and western Japan were not unified. This difference caused gold to flow out of the country.

To fix this, leaders like Ōkuma Shigenobu led a monetary reform program. He worked with officials like Inoue Kaoru and Itō Hirobumi. They sought to create a unified, modern system through the Ministry of Finance. One major change was making coins into circular discs instead of squares. The New Currency Act of 1871 officially adopted the yen. This act established the decimal system and replaced the old traditional units. The first gold yen coins, such as the 2, 5, and 20 yen denominations, were struck in 1870.

The Bank of Japan was founded in 1882 to manage the money supply. This centralized the banking system and helped stabilize the nation. In 1896, laws were changed to dissolve national banks and stop their notes from circulating. By 1899, Japan adopted a gold exchange standard. At that time, one yen was defined as 0.75 grams of fine gold. This was equivalent to approximately $0.4985 USD. This standard lasted until Japan left the gold standard in December 1931.

The value of the yen changed drastically during and after World War II. During the war, the yen fell in value due to inflation. Between 1941 and 1949, there was no true exchange rate. To stabilize the economy, the U.S. occupation government fixed the rate in 1949. Under the Bretton Woods system, the yen was pegged at ¥360 per US dollar. This fixed rate lasted until 1971, when the United States abandoned the gold standard. A short attempt to fix rates via the Smithsonian Agreement failed. By February 1973, the yen became a floating currency.

Since it began floating, the yen has experienced many shifts in value. In 1971, the yen was considered undervalued, creating a large trade surplus of $5.8 billion. This led to market pressures and government interventions. The Japanese government and the Ministry of Finance sometimes intervene in the currency market. They do this to slow down rapid movements in the exchange rate. For example, they intervened between 1998 and 2003 and again from 2010 to 2011. These actions were often intended to stop the yen from becoming too strong too quickly.

Recent years have seen further market activity. The government intervened in 2022 and 2024 to slow down the speculative selling of the yen. These movements are closely watched by the international community. The International Monetary Fund has noted that Japan remains committed to a flexible exchange rate. The history of the yen shows how a nation's money connects to global politics and trade. From the Meiji reforms to modern floating rates, the yen remains a vital tool for Japan's economic identity.