The History of the Yen: Japan’s Economic Journey Through Currency

The yen (¥), Japan’s official currency, has a rich history that reflects the country’s economic evolution and its place in the global financial landscape. Introduced during the Meiji Restoration, the yen has undergone numerous transformations, symbolising Japan’s rapid modernization, economic prosperity, and resilience through challenging times.

The Birth of the Yen

Meiji Restoration (1868-1912): The yen was introduced in 1871 during the Meiji era, a period of significant modernization and industrialization in Japan. The government aimed to centralise the monetary system and replace the complex system of feudal hansatsu (domain notes). The yen was initially defined as 1.5 grams of gold or 24.26 grams of silver, reflecting Japan’s adoption of the gold and silver standards.

Gold Standard (1897): In 1897, Japan officially adopted the gold standard, pegging the yen to gold at a rate of 2 yen per gram of gold. This move was part of Japan’s effort to stabilise its currency and integrate into the global economy. The gold standard increased international confidence in the yen, facilitating trade and investment.

The Interwar Period and WWII

Economic Turmoil and the Great Depression (1920s-1930s): The global economic instability of the 1920s and 1930s, including the Great Depression, significantly affected Japan. In 1931, Japan abandoned the gold standard as part of its response to the economic crisis, leading to a period of currency devaluation and inflation.

World War II (1939-1945): The yen’s value plummeted during World War II due to the immense financial strain of the war. Japan experienced severe inflation, and the currency became practically worthless by the war’s end.

Post-War Recovery and Economic Miracle

Post-War Reforms (1945-1950s): After Japan’s defeat in World War II, the country underwent significant economic and political reforms under Allied occupation. The yen was pegged to the US dollar at a fixed rate of 360 yen per dollar in 1949 as part of the Bretton Woods system. This stabilisation helped lay the foundation for Japan’s post-war economic recovery.

Economic Miracle (1950s-1970s): During the 1950s to 1970s, Japan experienced an economic boom known as the “Japanese Economic Miracle.” Rapid industrialization, technological innovation, and export-driven growth transformed Japan into one of the world’s leading economies. The fixed exchange rate system played a crucial role in maintaining economic stability during this period.

Floating Exchange Rate and Modern Era

End of Bretton Woods and Floating Yen (1971-1980s): The collapse of the Bretton Woods system in 1971 led to the yen transitioning to a floating exchange rate system in 1973. The yen’s value became determined by market forces, resulting in greater volatility but also reflecting Japan’s economic strength.

Plaza Accord (1985): The Plaza Accord of 1985 was a significant agreement among major economies, including Japan, to depreciate the US dollar relative to the yen and other currencies. The yen appreciated significantly, which impacted Japan’s export competitiveness and contributed to the asset price bubble of the late 1980s.

Asset Bubble and Lost Decades (1990s-2000s): The bursting of Japan’s asset price bubble in the early 1990s led to a prolonged period of economic stagnation known as the “Lost Decade.” Despite aggressive monetary policies and structural reforms, Japan struggled with deflation and slow growth.

The Yen in the 21st Century

Global Financial Crisis and Abenomics (2008-present): The global financial crisis of 2008 affected Japan, leading to renewed economic challenges. In response, Prime Minister Shinzo Abe introduced “Abenomics” in 2012, a series of economic policies aimed at revitalising the economy through monetary easing, fiscal stimulus, and structural reforms. The yen’s value fluctuated as Japan navigated these policies and global economic conditions.

Current Landscape: Today, the yen remains one of the world’s most traded currencies, reflecting Japan’s economic influence and stability. It is widely used as a safe-haven currency during times of global uncertainty, showcasing Japan’s resilient economic foundation.

As global interest rates began to rise at the start of 2022, JPY weakened against the major currencies as the BOJ reinforced easy monetary policy. JPY reached multi-decade lows against the USD, roughly a 30% drop over the past 4 years. In response to JPY weakness, the Ministry of Finance has intervened multiple times by selling USD against JPY. The intervention has taken many forms, starting with 1-day interventions as the MoF sold USD around key levels (150 and 160), but recent JPY activity points to more frequent intervention during moments of JPY strength. The BOJ has pivoted away from easy monetary policy with increases in the main policy rate.

Conclusion

The history of the yen is a testament to Japan’s dynamic economic journey. From its inception during the Meiji Restoration to its role in the modern global economy, the yen has mirrored Japan’s transformation and adaptability. Understanding the yen’s history provides valuable insights into Japan’s economic strategies, challenges, and achievements, highlighting the interplay between currency and national development.