What is the Japanese Yen?

Definition of the Japanese Yen

The Japanese yen is the official currency of Japan. It is the third most traded currency in foreign exchange markets after the US dollar and the euro. It is also one of the most held foreign reserves by central banks. The Japanese yen is typically abbreviated as JPY or can be represented by the symbol ¥.

Definitions and Examples of the Japanese Yen

The yen is the official Japanese currency and was adopted as legal tender by the Meiji government in 1871. The government wanted to modernize the monetary system to enhance Japan’s presence in international markets. The yen was previously pegged to the US dollar in 1949 at a rate of 360 Japanese yen to 1 US dollar. From 1959 to 1973, Japanese monetary authorities relaxed the fixed exchange rate of the yen to the US dollar but still kept the yen within a certain range of the US dollar. In 1973, Japanese monetary authorities allowed the yen to float freely.

Note: A freely floating currency means that the value of the currency is determined based on supply and demand relative to other currencies.

The Japanese yen is a reserve currency, meaning that central banks or treasuries will hold this currency as part of the country’s foreign exchange reserves. When countries hold currencies as reserves, they do so for various reasons, such as paying for imports and ensuring the stability of their own currency.

The Bank of Japan Act outlines how the Japanese yen banknotes are issued. Japanese yen banknotes are printed by the National Printing Bureau and come in four denominations: 10,000 yen, 5,000 yen, 2,000 yen, and 1,000 yen. Each denomination has different high-ink patterns (called tactile marks) on the edges of the banknotes and different physical sizes to facilitate distinguishing the value of the yen notes. The 5,000 and 10,000 yen notes also feature a unique transparent layer.

In addition to yen banknotes, there are yen coins available in the following denominations: a copper-nickel coin worth 500 yen, a copper coin worth 100 yen, a copper coin worth 50 yen, a bronze coin worth 10 yen, a copper coin worth 5 yen, and an aluminum coin worth 1 yen.

How the Japanese Yen Works

Japan allows the free movement of capital, meaning that money can flow in and out of the country for purposes of investment in real estate, businesses, or trade. With money flowing in and out of the country, the Japanese yen will fluctuate daily against other currencies. When money flows into Japan, it increases demand for the Japanese yen and causes the value of the country’s currency to rise, meaning it becomes more valuable compared to the currency of another country. If more money flows out of Japan, it may cause the value of the country’s currency to decline.

Note: In order to intervene in the foreign exchange markets, the Bank of Japan may buy and sell currencies using the foreign exchange fund special account (FEFSA), where the Japanese government holds large amounts of foreign assets.

For example, if the Bank of Japan intervenes in the foreign exchange market because the yen is high in value (making it very expensive for foreigners to buy goods from Japan), it will buy US dollars by selling yen. This will withdraw US dollars from the money supply and increase the amount of yen in the money supply, making the Japanese yen relatively less valuable than it was before.

What This Means for Individual Investors

Currency market fluctuations can affect most people in two ways. First, if they are conducting transactions in foreign currency as tourists or purchasing goods online using a foreign currency. Second, if they are investing in yen or trading currencies in forex markets.

It means

The strong yen means that the value of the yen is relatively high compared to other currencies, which means that more units of other currencies can be exchanged for one unit of yen. For example, if 6 US dollars can be exchanged for 1 Japanese yen, whereas the previous exchange rate was 4 US dollars for 1 yen, this indicates that the yen is relatively strong. Conversely, a weak yen means that more units of yen are needed to convert to other currencies.

Note: Currencies are traded in pairs in the forex market, and the USD-JPY pair is represented by the symbol USD/JPY.

Currency trading can be risky and may not be suitable for all investors. Currency traders need to understand currency movements, timing, and take risk management measures to avoid losses.

Key Takeaways

The Japanese yen was established in 1871 and remains the official currency of Japan today, symbolized by the symbol ¥. A strong yen means that the value of the yen is relatively high compared to other currencies. A weak yen means that more units of yen are needed to convert to other currencies. The Bank of Japan may intervene in foreign exchange markets to maintain a stable value for the yen. The USD-JPY pair is traded under the symbol USD/JPY in forex markets.

Sources:

The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts in our articles. Read our editorial process to learn more about how we verify facts and maintain the accuracy, reliability, and credibility of our content.

1. Bank for International Settlements. “Triennial Central Bank Survey Foreign Exchange Turnover in April 2019 – Monetary and Economic Department,” Page 4. Accessed Feb. 8, 2022.

2. International Monetary Fund. “Currency Composition of Official Foreign Exchange Reserves (COFER).” Accessed Feb. 8, 2022.

3. Bank of Japan Currency Museum. “The History of Japanese Currency.” Accessed Feb.8, 2022.

4. Bank for International Settlements. “Capital Account Liberalization: the Japanese Experience and Implications for China,” Page 1-2. Accessed Feb. 8, 2022.

5. Bank of Japan. “‘Touch-and-Tell’ Features for Identifying the Denominations of Bank of Japan Notes.” Accessed Feb. 8, 2022.

Source: https://www.thebalancemoney.com/what-is-the-japanese-yen-5218555