The Yen

Topics: United States dollar, Inflation, Exchange rate Pages: 10 (1771 words) Published: October 21, 2013

The Yen

In only 142 years Japan's economy changed from an antiquated monetary system to the world's

third most traded currency and forth most used reserve currency after the U.S. dollar, the euro, and the

pound sterling. Truly the Japanese Yen is still an unappreciated economic force waiting for it's chance

to take center stage on the world market.


The Yen came into existence May 10, 1871 after the Meiji government chose to abandon

Tokugawa coinage, a complex monetary system of Japan's Edo period, and passed the “New Currency

Act of 1871”. The new system stipulated the adoption of the decimal accounting system for the new

currency and resulted in the Yen basically being a dollar unit with several less valuable denominations,

the Sen (1/100) the value of the Yen and the Rin (1/1000) the value of the Yen, both of which were

taken out of circulation at the end of 1953. The Yen was legally defined as 24.26 grams of pure silver

or 1.5 grams of pure gold. Following the silver devaluation of 1873 the Yen quickly devalued against

the US and Canadian Dollars, which used the gold standard for their currency. Due to the large loss of

value of the Yen after 1873 Japan adopted a gold standard for the Yen in 1897 which froze it's value at

1 Yen being worth $0.50 US.


Between 1980 and 1985 the U.S. Dollar had appreciated significantly against the Japanese Yen,

Deutsche Mark, French Franc and British Pound. Because of this American industry was experiencing

major difficulties competing in the world market and an escalating current account deficit. It was then

decided that an agreement between all the involved currencies countries of origin would be needed to

artificially depreciate the U.S. Dollar against the German Deutsche Mark and Japanese Yen. This was

called the Plaza Accord and was signed by all five involved governments September 22, 1985. As the

exchange rate value of the Dollar versus the Yen continued to decline the strengthened Yen created an

incentive for “expansionary monetary policies” which would end up leading to the “Japanese asset

price bubble” in the late 1980's.

In the late 1980's, Japan’s economy embarked on a period of rapid escalation in the prices of

shares and real estate. This “bubble economy” was followed by a collapse in asset values, a reduced

pace of real economic growth, banking problems, and deflation. This time period would become

known as “The Lost Decade”. Financial observers of Japan blame its monetary policy for failing to

react promptly and aggressively enough, both as asset prices exploded upward in the late 1980's and as

they plummeted afterward. In these accounts, official concerns about the Yen’s foreign exchange rate

and the competitiveness of the export sector were significant considerations for monetary policy. Later

two distinct periods of endaka fukyo, or recession induced by a strong yen, would occur. One in the

late 1980's and one in the early 1990's at critical phases of the monetary policy cycle.


In late 1989 the Bank of Japan sharply raised interest rates to try to combat the growing “asset

bubble” and in doing so caused the bubble to burst. A stock market crash and debt crisis would soon

follow the bursting of the bubble and lead to capital infusions by the Japanese government, loans from

the central Bank of Japan and ultimately a large number of so called “zombie banks” rising from the

ashes of formerly solvent banks. As the decade went on many of the now zombie financial institutions

became unsustainable, even with government bailout's and capital infusions, and were consolidated. A

side effect from this and the bubble in general, was a period of time where obtaining credit became

very difficult if not impossible to do...
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