Japanese Paper Money From World War 2

[Carmine Osterland]

Theyen (Japanese: 円, symbol: ; code: JPY) is the official currency of Japan. It is the third-most traded currency in the foreign exchange market, after the United States dollar and the euro.[2] It is also widely used as a third reserve currency after the US dollar and the euro.

Following World War II, the yen lost much of its pre-war value. To stabilize the Japanese economy, the exchange rate of the yen was fixed at 360 per US$ as part of the Bretton Woods system. When that system was abandoned in 1971, the yen became undervalued and was allowed to float. The yen had appreciated to a peak of 271 per US$ in 1973, then underwent periods of depreciation and appreciation due to the 1973 oil crisis, arriving at a value of 227 per US$ by 1980.

Since 1973, the government of Japan has maintained a policy of currency intervention, so the yen is under a managed float regime. The Japanese government focused on a competitive export market, and tried to ensure a low exchange rate for the yen through a trade surplus. The Plaza Accord of 1985 temporarily changed this situation; the exchange rate fell from its average of 239 per dollar in 1985 to 128 in 1988 and led to a peak rate of 80 against the US$ in 1995, effectively increasing the value of Japan's GDP in dollar terms to almost that of the United States.[4]

Since that time, however, the world price of the yen has greatly decreased, falling to an average of almost 158 per dollar and 170 per euro in June 2024.[5] The Bank of Japan maintains a policy of zero to near-zero interest rates and the Japanese government has previously had a strict anti-inflation policy.[6] From late 2021 to first half 2024, the yen depreciated against the dollar by about 50%,[7][5] giving rise to serious concern in Japan about long-term prospects for the currency.[8][9][10] The sharp fall in the value of the currency has led some companies, including Modec, to stop presenting their financial statements in Japanese yen.[11] However, this weakness has had some benefits for Japan's tourism industry, as the low exchange rate makes its purchasing power attractive for travellers, particularly those from foreign nations.[12][13]

The spelling and pronunciation "yen" is standard in English, because when Japan was first encountered by Europeans around the 16th century, Japanese /e/ (え) and /we/ (ゑ) both had been pronounced [je] and Portuguese missionaries had spelled them "ye".[b] By the middle of the 18th century, /e/ and /we/ came to be pronounced [e] as in modern Japanese, although some regions retain the [je] pronunciation. Walter Henry Medhurst, who had neither been to Japan nor met any Japanese people, having consulted mainly a Japanese-Dutch dictionary, spelled some "e"s as "ye" in his An English and Japanese, and Japanese and English Vocabulary (1830).[16] In the early Meiji era, James Curtis Hepburn, following Medhurst, spelled all "e"s as "ye" in his A Japanese and English dictionary (1867); in Japanese, e and i are slightly palatalized, somewhat as in Russian.[17] That was the first full-scale Japanese-English/English-Japanese dictionary, which had a strong influence on Westerners in Japan and probably prompted the spelling "yen". Hepburn revised most "ye"s to "e" in the 3rd edition (1886)[18] to mirror the contemporary pronunciation, except "yen".[19]

Japanese yen denominated paper currency was also conceived with the coins in 1870 as Meiji Tsuho notes by Italian engraver Edoardo Chiossone.[32] These were released as fiat currency in denominations of 1, 2, 5, 10, 50, and 100 yen along with subsidiary notes of 10, 20, and 50 sen in 1872. Almost concurrently, the government established a series of national banks modeled after the system in the United States which issued national bank notes.

Massive inflation from the Satsuma Rebellion in 1877 caused a glut of non-redeemable fiat currency notes. The issuance of national fiat banknotes was ultimately suspended in 1880 by then prime minister Matsukata Masayoshi.[33][34] New policies were put into place which included the establishment of a centralized banking system.[35][34] The Bank of Japan hence commenced operations on October 10, 1882, with the authority to print banknotes that could be exchanged for the old Government and National Bank Notes.[36][37] By May 1883, another act provided the redemption and retirement of national bank notes.[38][39] The National Bank Act was amended again in March 1896, providing for the dissolution of the national banks on the expiration of their charters.[38] This amendment also prohibited national bank notes from circulating after December 31, 1899.[40] In that year, Japan adopted a gold exchange standard, defining the yen as 0.75 g fine gold or US$0.4985.[41]

After a period of instability, on April 25, 1949, the U.S. occupation government fixed the value of the yen at 360 per USD through a United States plan, which was part of the Bretton Woods system, to stabilize prices in the Japanese economy.[45]

That exchange rate was maintained until 1971, when the United States abandoned the gold standard, ending a key element of the Bretton Woods system, and setting in motion changes that eventually led to floating exchange rates in 1973.[citation needed]

By 1971, the yen had become undervalued. Japanese exports were costing too little in international markets, and imports from abroad were costing the Japanese too much. This undervaluation was reflected in the current account balance, which had risen from the deficits of the early 1960s, to a then-large surplus of US$5.8 billion in 1971. The belief that the yen, and several other major currencies, were undervalued motivated the United States' actions in 1971.

Following the United States' measures to devalue the dollar in the summer of 1971, the Japanese government agreed to a new, fixed exchange rate as part of the Smithsonian Agreement, signed at the end of the year. This agreement set the exchange rate at 308 per US$. However, the new fixed rates of the Smithsonian Agreement were difficult to maintain in the face of supply and demand pressures in the foreign-exchange market. In early 1973, the rates were abandoned, and the major nations of the world allowed their currencies to float.

After World War II the United States-administered Okinawa issued a higher-valued currency called the B yen from 1946 to 1958, which was then replaced by the U.S. dollar at the rate of $1 = 120 B yen. Upon the reversion of Okinawa to Japan in 1972 the Japanese yen then replaced the dollar. In light of the dollar's reduction in value from 360 to 308 just before the reversion, an unannounced "currency confirmation" took place on October 9, 1971, wherein residents disclosed their dollar holdings in cash and bank accounts; dollars held that day amounting to US$60 million were entitled for conversion in 1972 at a higher rate of 360.[46]

In the 1970s, Japanese government and business people were very concerned that a rise in the value of the yen would hurt export growth by making Japanese products less competitive and would damage the industrial base. The government, therefore, continued to intervene heavily in foreign-exchange marketing (buying or selling dollars), even after the 1973 decision to allow the yen to float.[47]

During the first half of the 1980s, the yen failed to rise in value, though current account surpluses returned and grew quickly. From 221 per US$ in 1981, the average value of the yen actually dropped to 239 per US$ in 1985. The rise in the current account surplus generated stronger demand for yen in foreign-exchange markets, but this trade-related demand for yen was offset by other factors. A wide differential in interest rates, with United States interest rates much higher than those in Japan, and the continuing moves to deregulate the international flow of capital, led to a large net outflow of capital from Japan. This capital flow increased the supply of yen in foreign-exchange markets, as Japanese investors changed their yen for other currencies (mainly dollars) to invest overseas. This kept the yen weak relative to the dollar and fostered the rapid rise in the Japanese trade surplus that took place in the 1980s.

In 1985, a dramatic change began. Finance officials from major nations signed an agreement (the Plaza Accord) affirming that the dollar was overvalued (and, therefore, the yen undervalued). This agreement, and shifting supply and demand pressures in the markets, led to a rapid rise in the value of the yen. From its average of 239 per US$ in 1985, the yen rose to a peak of 128 in 1988, virtually doubling its value relative to the dollar. After declining somewhat in 1989 and 1990, it reached a new high of 123 to US$ in December 1992. In April 1995, the yen hit a peak of under 80 yen/US$, temporarily making Japan's economy nearly the size of that of the US.[48]

The yen declined during the Japanese asset price bubble and continued to do so afterwards, reaching a low of 134 to US$ in February 2002. The Bank of Japan's policy of zero interest rates has discouraged yen investments, with the carry trade of investors borrowing yen and investing in better-paying currencies (thus further pushing down the yen) estimated to be as large as $1 trillion.[49] In February 2007, The Economist estimated that the yen was 15% undervalued against the dollar, and as much as 40% undervalued against the euro.[50]

On April 4, 2013, the Bank of Japan announced that they would expand their asset purchase program by $1.4 trillion in two years. The Bank of Japan hopes to bring Japan from deflation to inflation, aiming for 2% inflation. The number of purchases is so large that it is expected to double the money supply, but this move has sparked concerns that the authorities in Japan are deliberately devaluing the yen to boost exports.[51] However, the commercial sector in Japan worried that the devaluation would trigger an increase in import prices, especially for energy and raw materials.

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