The Japanese Yen

The yen is the currency of Japan. It is also the unofficial trading currency for various Asian nations, known as the “Yen Bloc”. The yen is the third most circulated currency in foreign exchange markets after the Euro and the US dollar, and is also used extensively as a reserve currency.

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History

The yen was introduced in 1872 as part of the modernization of the Japanese currency system. The value of the yen was originally linked directly to that of gold. After extensive devaluation resulting from World War II, the Bretton Woods system linked the yen to the US dollar. In turn, when the US started to abandon strict adherence to the gold standard in the early 1970s, the yen was allowed to float in 1973. However, since 1973, the Japanese government has maintained a policy of currency intervention, and the yen is therefore under a “dirty float” regime.

This intervention continues until today. The Japanese government focuses on a competitive export market, and tries to ensure a low yen value. The Plaza Accord of 1985 temporarily changed this situation and led to a peak value against the US dollar in 1995, effectively increasing the value of Japan’s GDP to almost that of the United States. Since that time, however, the yen has greatly decreased in value. The Bank of Japan maintains a policy of zero to near-zero interest rates and the Japanese government has an extreme anti-inflation policy.

Future Outlook

The yen is widely regarded as undervalued, and the Japanese government cannot keep supporting this low level indefinitely. The current situation is very similar to 1998, when low interest rates also created an undervalued yen, and a few global economic shocks - relatively moderate in nature – cause the yen to rapidly appreciate. The increase in value had seriously negative effects on various industries that relied on a cheap yen.

Other Currencies:

The Swiss Franc
The Pound
The US Dollar
The Euro

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