The Japanese yen is the official currency of Japan. It is the third most traded currency in foreign exchange markets after the U.S. dollar and euro. It is also one of the most widely held foreign exchange reserves by central banks. The Japanese yen is commonly abbreviated JPY or can be represented by the symbol ¥.
Definitions and Examples of the Japanese Yen
The yen is the official Japanese currency and it was adopted as legal tender by the Meiji government in 1871. The government wanted to modernize the monetary system in order to strengthen Japan’s presence in international markets.
The yen was previously fixed to the U.S. dollar in 1949 at a rate of 360 JPY to 1 USD. From 1959 to 1973 the Japanese monetary authorities relaxed the fixed exchange rate to the U.S. dollar but still kept the yen within a certain margin of the USD. In 1973, the Japanese monetary authorities let the yen float freely.
A free-floating currency means the value of the currency is determined by its supply and demand relative to other currencies.
The Japanese yen is a reserve currency which means that central banks or treasuries will hold that currency as part of a country’s foreign exchange holdings. When countries hold currencies in reserve they do so for a number of reasons, such as to pay for imports and to ensure the stability of their own currency.
The Bank of Japan Act stipulates how the Bank of Japan issues yen banknotes. 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 specific denomination has different raised ink patterns (called tactile marks) on the edges of the banknote and different physical sizes to make it easier to differentiate the value of the yen banknote. The 5,000 and 10,000 yen banknotes also have a unique hologram transparent layer.
In addition to yen banknotes, there are yen coins that come in the following denominations: 500 yen nickel-brass coin, 100 yen cupronickel coin, 50 yen cupronickel coin, 10 yen bronze coin, 5 yen brass coin, 1 yen aluminum coin.
How the Japanese Yen Works
Japan allows free movement of capital, which means that money can come in and out of the country for purposes of investment in real estate, businesses, or trade. As money is flowing in and out of the country, the Japanese yen will fluctuate daily with other currencies. When money flows into Japan, this will increase demand for the Japanese yen and cause the country’s currency to appreciate, meaning it becomes more valuable relative to another country’s currency. If more money flows out of Japan, it may cause the country’s currency to depreciate.
The Bank of Japan, which conducts foreign exchange policy with the country’s ministry of finance (MOF), will intervene in the foreign exchange market in order to contain excessive fluctuations in the value of the yen.
In order to intervene in foreign exchange markets, the Bank of Japan may buy and sell currencies by using the Foreign Exchange Fund Special Account (FEFSA), which is where the Japanese government holds large amounts of foreign assets.
For example, if the Bank of Japan is intervening in the foreign exchange market because the yen is overvalued (making it too expensive for foreigners to buy goods from Japan) then they will buy U.S. dollars by selling yen. This will take U.S. dollars out of the money supply and increase the amount of yen in the money supply, making the Japanese yen relatively less valuable than before.
What It Means for Individual Investors
Fluctuations in currency markets can impact most people in two ways. First, if they’re making transactions in the foreign currency as tourists or purchasing items online using a foreign currency. Second, if they’re investing in the yen or trading currencies in the forex markets.
A strong yen means the value of the yen is relatively high compared to other currencies, which means more units of other currencies can be exchanged per unit of yen. For example, if $6 (U.S. dollars) are exchanged for ¥1 (Japanese yen), when previously the exchange rate was $4 to ¥1, this means the yen is relatively strong. Conversely, a weak yen means that more units of yen are needed to convert to other currencies.
Currencies are traded as pairs in the forex market, and the U.S. Dollar–Japanese yen pair is denoted by USD/JPY.
Currency trading can be risky and not suited for all investors. Currency traders need to understand currency movements, timing and put risk management measures in place to avoid losses.
- The Japanese yen was founded in 1871 and remains the official currency of Japan today, denoted by ¥.
- A strong yen means 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 (BOJ) may intervene in foreign exchange markets to maintain a stable value of the yen.
- The U.S. dollar-Japanese yen currency pair trades with the USD/JPY symbol in the forex markets.