History
Introduction
The
yen was introduced by the Meiji government in 1872 as
a system resembling those in Europe. The yen replaced
the complex monetary system of the Edo period, based on
the mon. The New Currency Act of 1871 stipulated
the adoption of the decimal accounting system of yen ,
with the coins being round and cast as in the West. The
yen was legally defined as 0.78 troy ounces (24.26 g)
of pure silver, or 1.5 grams of pure gold. The same amount
of silver is worth about 1181 modern yen,[1]
while the same amount of gold is worth about 3572 yen.[2]
The Act also moved Japan onto the gold standard. (The
sen and the rin were eventually taken out of circulation
at the end of 1953.[3])
Fixed
value of the yen to the US dollar
The
yen lost most of its value during and after World War
II. After a period of instability, in 1949, the value
of the yen was fixed at ¥360 per US$1 through a United
States plan, which was part of the Bretton Woods System,
to stabilize prices in the Japanese economy. That exchange
rate was maintained until 1971, when the United States
abandoned the gold standard, which had been a key element
of the Bretton Woods System, and imposed a 10 percent
surcharge on imports, setting in motion changes that eventually
led to floating exchange rates in 1973.
Undervalued
yen
By
1971 the yen had become undervalued. Japanese exports
were costing too little in international markets, and
imports from abroad were costing the Japanese too much.
This undervaluation was reflected in the current account
balance, which had risen from the deficits of the early
1960s to a then-large surplus of U.S. $5.8 billion in
1971. The belief that the yen, and several other major
currencies, were undervalued motivated the United States'
actions in 1971.
Yen
and major currencies float
Following
the United States' measures to devalue the dollar in the
summer of 1971, the Japanese government agreed to a new,
fixed exchange rate as part of the Smithsonian Agreement,
signed at the end of the year. This agreement set the
exchange rate at ¥308 per US$1. However, the new fixed
rates of the Smithsonian Agreement were difficult to maintain
in the face of supply and demand pressures in the foreign-exchange
market. In early 1973, the rates were abandoned, and the
major nations of the world allowed their currencies to
float.
Japanese
government intervention in the currency market
In
the 1970s, Japanese government and business people were
very concerned that a rise in the value of the yen would
hurt export growth by making Japanese products less competitive
and would damage the industrial base. The government therefore
continued to intervene heavily in foreign-exchange marketing
(buying or selling dollars), even after the 1973 decision
to allow the yen to float.
Despite
intervention, market pressures caused the yen to continue
climbing in value, peaking temporarily at an average of
¥271 per US$1 in 1973 before the impact of the 1973 oil
crisis was felt. The increased costs of imported oil caused
the yen to depreciate to a range of ¥290 to ¥300 between
1974 and 1976. The re-emergence of trade surpluses drove
the yen back up to ¥211 in 1978. This currency strengthening
was again reversed by the second oil shock in 1979, with
the yen dropping to ¥227 by 1980.
Yen
in the early 1980s
During
the first half of the 1980s, the yen failed to rise in
value even though current account surpluses returned and
grew quickly. From ¥221 in 1981, the average value of
the yen actually dropped to ¥239 in 1985. The rise in
the current account surplus generated stronger demand
for yen in foreign-exchange markets, but this trade-related
demand for yen was offset by other factors. A wide differential
in interest rates, with United States interest rates much
higher than those in Japan, and the continuing moves to
deregulate the international flow of capital, led to a
large net outflow of capital from Japan. This capital
flow increased the supply of yen in foreign-exchange markets,
as Japanese investors changed their yen for other currencies
(mainly dollars) to invest overseas. This kept the yen
weak relative to the dollar and fostered the rapid rise
in the Japanese trade surplus that took place in the 1980s.
Effect
of the Plaza Accord
In
1985 a dramatic change began. Finance officials from major
nations signed an agreement (the Plaza Accord) affirming
that the dollar was overvalued (and, therefore, the yen
undervalued). This agreement, and shifting supply and
demand pressures in the markets, led to a rapid rise in
the value of the yen. From its average of ¥239 per US$1
in 1985, the yen rose to a peak of ¥128 in 1988, virtually
doubling its value relative to the dollar. After declining
somewhat in 1989 and 1990, it reached a new high of ¥123
to US$1 in December 1992. In April 1995, the yen hit a
peak of under 80 yen per dollar, temporarily making Japan's
economy nearly the size of the US.
Post-bubble
years
The
yen declined during the Japanese asset price bubble and
continued to do so afterwards, reaching a low of ¥134
to US$1 in February 2002. The Bank of Japan's policy of
zero interest rates has discouraged yen investments, with
the carry trade of investors borrowing yen and investing
in better-paying currencies (thus further pushing down
the yen) estimated to be as large as $1 trillion.[4] In February 2007, The Economist estimated
that the yen is 15% undervalued against the dollar and
as much as 40% undervalued against the euro.[5]
.
Determinants
of value
The
relative value of the yen is determined in foreign exchange
markets by the economic forces of supply and demand. The
supply of the yen in the market is governed by the desire
of yen holders to exchange their yen for other currencies
to purchase goods, services, or assets. The demand for
the yen is governed by the desire of foreigners to buy
goods and services in Japan and by their interest in investing
in Japan (buying yen-denominated real and financial assets).
Beginning
in December 1931, Japan gradually shifted from the gold
standard system to the managed currency system.[9]
International
reserve currency
-
Historical
exchange rate
The
table below shows the number of yen per U.S. dollar. (monthly average)
| Year |
Month |
| Jan |
Feb |
Mar |
Apr |
May |
Jun |
Jul |
Aug |
Sep |
Oct |
Nov |
Dec |
| 1949-71 |
360 |
| 1972 |
308 |
| 1973 |
301.15 |
270.00 |
265.83 |
265.50 |
264.95 |
265.30 |
263.45 |
265.30 |
265.70 |
266.68 |
279.00 |
280.00 |
| 1974 |
299.00 |
287.60 |
276.00 |
279.75 |
281.90 |
284.10 |
297.80 |
302.70 |
298.50 |
299.85 |
300.10 |
300.95 |
| 1975 |
297.85 |
286.60 |
293.80 |
293.30 |
291.35 |
296.35 |
297.35 |
297.90 |
302.70 |
301.80 |
303.00 |
305.15 |
| 1976 |
303.70 |
302.25 |
299.70 |
299.40 |
299.95 |
297.40 |
293.40 |
288.76 |
287.30 |
293.70 |
296.45 |
293.00 |
| 1977 |
288.25 |
283.25 |
277.30 |
277.50 |
277.30 |
266.50 |
266.30 |
267.43 |
264.50 |
250.65 |
244.20 |
240.00 |
| 1978 |
241.74 |
238.83 |
223.40 |
223.90 |
223.15 |
204.50 |
190.80 |
190.00 |
189.15 |
176.05 |
197.80 |
195.10 |
| 1979 |
201.40 |
202.35 |
209.30 |
219.15 |
219.70 |
217.00 |
216.90 |
220.05 |
223.45 |
237.80 |
249.50 |
239.90 |
| 1980 |
238.80 |
249.80 |
249.70 |
238.30 |
224.40 |
218.15 |
226.85 |
219.20 |
212.00 |
211.75 |
216.75 |
203.60 |
| 1981 |
205.20 |
208.85 |
211.40 |
215.00 |
223.50 |
225.75 |
239.75 |
228.75 |
231.55 |
233.35 |
214.15 |
220.25 |
| 1982 |
228.45 |
235.20 |
248.30 |
236.30 |
243.70 |
255.55 |
256.65 |
259.60 |
269.40 |
277.40 |
253.45 |
235.30 |
| 1983 |
238.40 |
235.55 |
239.30 |
237.70 |
238.60 |
239.80 |
241.50 |
246.75 |
236.10 |
233.65 |
234.20 |
232.00 |
| 1984 |
234.74 |
233.28 |
224.75 |
226.30 |
231.63 |
237.45 |
245.45 |
241.70 |
245.40 |
245.30 |
246.50 |
251.58 |
| 1985 |
254.78 |
259.00 |
250.70 |
251.40 |
251.78 |
248.95 |
236.65 |
237.10 |
216.00 |
211.80 |
202.05 |
200.60 |
| 1986 |
192.65 |
180.45 |
179.65 |
168.10 |
172.05 |
163.95 |
154.15 |
156.05 |
153.63 |
161.45 |
162.20 |
160.10 |
| 1987 |
152.30 |
153.15 |
145.65 |
139.65 |
144.15 |
146.75 |
149.25 |
142.35 |
146.35 |
138.55 |
132.45 |
122.00 |
| 1988 |
127.18 |
128.12 |
124.50 |
124.82 |
124.80 |
132.20 |
132.53 |
134.97 |
134.30 |
125.00 |
121.85 |
125.90 |
| 1989 |
129.13 |
127.15 |
132.55 |
132.49 |
142.70 |
143.95 |
138.40 |
144.28 |
139.35 |
142.15 |
142.90 |
143.40 |
| 1990 |
144.40 |
148.52 |
157.65 |
159.08 |
151.75 |
152.85 |
147.50 |
144.50 |
137.95 |
129.35 |
132.75 |
135.40 |
| 1991 |
131.40 |
131.95 |
140.55 |
137.42 |
137.97 |
138.15 |
137.83 |
136.88 |
132.95 |
131.00 |
130.07 |
125.25 |
| 1992 |
125.78 |
129.33 |
133.05 |
133.38 |
128.33 |
125.55 |
127.30 |
123.42 |
119.25 |
123.35 |
124.75 |
124.65 |
| 1993 |
124.30 |
117.85 |
115.35 |
111.10 |
107.45 |
106.51 |
105.60 |
104.18 |
105.10 |
108.23 |
108.82 |
111.89 |
| 1994 |
109.55 |
104.30 |
102.80 |
102.38 |
104.38 |
98.95 |
99.93 |
99.57 |
98.59 |
97.37 |
98.98 |
99.83 |
| 1995 |
98.58 |
96.93 |
88.38 |
83.77 |
83.19 |
84.77 |
88.17 |
97.46 |
98.18 |
101.90 |
101.66 |
102.91 |
| 1996 |
106.92 |
104.58 |
106.49 |
104.29 |
108.37 |
109.88 |
107.13 |
108.40 |
111.45 |
113.27 |
113.44 |
115.98 |
| 1997 |
122.13 |
120.88 |
123.97 |
126.92 |
116.43 |
114.30 |
117.74 |
119.39 |
121.44 |
120.29 |
127.66 |
129.92 |
| 1998 |
127.34 |
126.72 |
133.39 |
131.95 |
138.72 |
139.95 |
143.79 |
141.52 |
135.72 |
116.09 |
123.83 |
115.20 |
| 1999 |
115.98 |
120.32 |
119.99 |
119.59 |
121.37 |
120.87 |
115.27 |
110.19 |
105.66 |
104.89 |
102.42 |
102.08 |
| 2000 |
106.90 |
110.27 |
105.29 |
106.44 |
107.30 |
105.40 |
109.52 |
106.43 |
107.75 |
108.81 |
111.07 |
114.90 |
| 2001 |
116.38 |
116.44 |
125.27 |
124.06 |
119.06 |
124.27 |
124.79 |
118.92 |
119.29 |
121.84 |
123.98 |
131.47 |
| 2002 |
132.94 |
133.89 |
132.71 |
127.97 |
123.96 |
119.22 |
119.82 |
117.97 |
121.79 |
122.48 |
122.44 |
119.37 |
| 2003 |
119.21 |
117.75 |
119.02 |
119.46 |
118.63 |
119.82 |
120.11 |
117.13 |
110.48 |
108.99 |
109.34 |
106.97 |
| 2004 |
105.88 |
109.08 |
103.95 |
110.44 |
109.56 |
108.69 |
111.67 |
109.86 |
110.92 |
105.87 |
103.17 |
103.78 |
| 2005 |
103.58 |
104.58 |
106.97 |
105.87 |
108.17 |
110.37 |
112.18 |
111.42 |
113.28 |
115.67 |
119.46 |
117.48 |
| 2006 |
117.18 |
116.35 |
117.47 |
114.32 |
111.85 |
114.66 |
114.47 |
117.23 |
117.91 |
118.01 |
117.23 |
115.57 |
| 2007 |
118.72 |
121.29 |
115.86 |
117.83* |
119.52* |
122.67 |
118.99 |
116.24 |
115.27 |
114.78 |
110.29 |
113.12 |
| 2008 |
106.57 |
107.18 |
102.49 |
|
Source:[10] |
See
also
References
