Technical Terms

Japanese yen is the national currency of Japan and is ranked 3rd among the five most traded currencies of the world succeeding United States dollar and euro at 1st and 2nd places. The currency is not used in any other country of the world but it posses a prominent importance as a reserve currency in the world after the United States dollar and euro. Yen was adopted as the official currency of Japan in around the year 1871 when the New Currency Act was conferred upon.

In the initial stages of its introduction, it was pegged to the dollar at a fixed rate but currently the currency uses a floating exchange rate system. The currency code for Yen is JPY and the numeric code 392 as per the ISO 4217 standards and is depicted by '¥' symbol all over the world while in Japanese language it is symbolized as '円'.

Overview

Japanese yen came into existence with the efforts of Meiji restoration government after the end of Edo period. Currently it is termed as the third most important currency in the world. The word ‘yen’ means a round object in the Japanese language. Perhaps this was the reason due to which this word is used for a currency depicting the shape of a coin. As far as dollarization against the adoption of the Japanese yen is concerned, no country has done that yet but still the yen serves as the leading reserve currency after US dollar and Euro. The currency has experienced much volatility in its value but it still survived and earned the reputation it currently has. The Japanese yen adopted the fixed rate regime and was pegged to the US dollar @ 1USD = ¥360, after it lost much of its value during the Second World War. It gained back its value in the 80s when it adopted the floating rate regime after the collapse of the Bretton Woods monetary system.

The oil prices in the world directly affect the value of the yen as Japan imports all of the oil that is needed in the country. In the current scenario of rising oil prices, the currency’s value is on a drop. Another of the currency’s feature is that yen does not have its circulation area outside the country. This often affects the value of the yen negatively making it weaker. Some of the Japanese economist also argue that if yen’s value would rise and if the currency would gain strength, it would affect the manufacturing industry adversely as the prices of the goods they produce would increase making the goods less competitive in the international market.

Japan is one of the countries that were the earliest to recognize the concept and need of currency. This is clear from the fact the monetary system and the coins along with their shape, measure and script were developed as early as in 221 BC under the reign of Qin dynasty. These attributes of Japanese currency were altered time and again by other authorities that succeeded in the future. With time the monetary system got more and more complex with the commencement of use of the precious metals in the minting of coins. During the late 15th century, "Koshu kin monetary system" was adopted in which, gold was used to make coins and it made the use of a large number units like ryo, bu, shu, shuchu, itome, koitome, koitomechu that had different values stamped on the obverse side of the coin.

With the start of the Edo period, the currency of Japan was unified with the efforts of Tokugawa Iyesu. The monetary system then adopted consisted of gold, silver and copper coins with each coin symbolizing different value. The Edo period stretched until the Meiji restoration government gained authority in around 1867. This marked the origination of the current Japanese currency - yen. The yen overtook all the complex form of currencies that were issued in the Edo period and gave the country the first currency that was based on the decimal system. With the motive to reform the financial structure in Japan, going one step ahead, the Meiji government ordered a German company to print paper currency for the country. The currency notes of yen in 9 denominations were issued by 153 national banks that were exactly same in their shapes and sizes except the bank names.

During the World War II, the Japanese currency lost most of its value and instability crept in the country’s financial structure. In 1949, yen was pegged to the United States dollar on a fixed basis for the purpose to gain back its strength. But when in 1971, the Bretton Woods system collapsed, a floating exchange rate system was introduced for the Japanese currency.

The volatility in the foreign exchange rates depends upon a numerous macro economic factors that have different degrees of importance to different economies of the world. Some special and exceptional factors affecting the rates may also exist in the case of different countries. Following are shown the common factors on which the foreign exchange rate depends

• Flow of imports and exports between the countries
• Flow of capital between the countries
• Relative inflation rates
• Fluctuation limits on exchange rate imposed by the governments of the countries
• Merchandise trade balance
• Rate of inflation in the country
• Flow of funds between the countries for the payment of stock and bond purchases
• Relative growth
• Short term and long term interest rate differentials
• Cost of borrowings