Everything About the Japanese Yen: History, Present, and Future Outlook

A comprehensive look at the turbulent history of the Japanese yen, one of the world’s top three reserve currencies.

• Understand the historical flow from the birth of the yen to the era of the “super-weak yen.”
• Grasp the key impact of the US-Japan interest rate differential on the yen’s value.
• Analyze the opportunities and threats the weak yen poses to the Korean economy.

Hello! Today, we will dive deep into the Japanese yen, a crucial pillar of the global economy. The yen’s value is more than just an exchange rate number; it reflects Japan’s economic strength, monetary policy, and international standing. In this article, we will explore the yen’s history by era, tracing its rise and fall alongside economic narratives.

Chapter 1: The Birth and Early Stability of the Yen (1871 ~ Early 1970s)

Meiji Restoration and the Introduction of the Yen (1871)

The history of the Japanese yen dates back to the late 19th century during the Meiji Restoration. In 1871, the yen was officially introduced as the currency under the “New Currency Act.” This was a key step to organize the complex feudal monetary system and advance toward a modern nation.

At that time, the New Currency Act defined the yen’s value as 1.5 grams of gold, establishing Japan’s monetary sovereignty, which later became the foundation for rapid economic growth.

Postwar Fixed Exchange Rate System and the Collapse of the Bretton Woods System

After World War II, Japan maintained a fixed exchange rate of 1 dollar = 360 yen to rebuild its economy. Thanks to the deliberately undervalued yen, Japanese products gained tremendous price competitiveness, which was a key driver of the “Japanese economic miracle.”

However, with the 1971 “Nixon Shock” that collapsed the Bretton Woods system, Japan adopted a floating exchange rate system in 1973, allowing market forces to determine the yen’s value. This marked a major shift exposing the yen directly to international market dynamics.

Chapter 2: The Plaza Accord and the Bubble Economy (Mid-1980s ~ Early 1990s)

Plaza Accord (1985) and the Surge in Yen Value

In the mid-1980s, to address the massive US trade deficit, the G5 finance ministers met at the Plaza Hotel in New York and agreed to deliberately devalue the dollar, known as the famous “Plaza Accord.”

Following this agreement, the exchange rate plunged from about 240 yen per dollar to the 120 yen range within just two years, causing the yen’s value to soar by an astounding 46.3%.

Formation and Collapse of the Bubble Economy

The rapid yen appreciation (yen strength) hurt export companies, prompting the Bank of Japan to lower the benchmark interest rate to 2.5% to prevent recession. However, this low-interest policy funneled massive liquidity into real estate and stock markets, triggering the worst bubble economy in history.

At the time, there was a saying that “if you sell Tokyo, you can buy the entire United States,” reflecting the abnormally inflated asset values. The seemingly eternal bubble began bursting in 1989 when the Bank of Japan raised interest rates, leaving a deep scar known as Japan’s “Lost 30 Years.”

Chapter 3: The “Lost 30 Years” and the Deflation Trap (1990s ~ Early 2010s)

After the bubble burst, Japan’s economy fell into a prolonged deflation and stagnation. Japan’s “Lost 30 Years” is often compared to the long-term low growth experienced by Western countries after the 2008 global financial crisis. However, Japan’s case offers deeper lessons due to the combination of chronic deflationary mindset and population aging, which weakened policy effectiveness.

To counter this, the Bank of Japan implemented the world’s first central bank Quantitative Easing (QE) in 2001, injecting money into the market, but it was insufficient to solve deep structural problems.

Interestingly, during the 2008 global financial crisis, the yen temporarily surged as a “safe-haven asset.” This reflected Japan’s relative stability amid global turmoil but was driven by special circumstances rather than fundamental economic strength.

Chapter 4: Abenomics and the Super-Weak Yen Era (2012 ~ Present)

In 2012, Prime Minister Shinzo Abe launched “Abenomics” aiming to escape long-term deflation. The core strategy was to lower the yen’s value through “unlimited quantitative easing” to boost exports and stimulate the economy.

However, due to overseas relocation of production bases, the traditional formula of “weak currency = strong exports” no longer held, and instead, import costs increased, causing side effects.

US-Japan Interest Rate Differential and Deepening Yen Weakness

The most direct cause of the recent “super-weak yen” phenomenon is the extreme interest rate gap between the US and Japan. While the world raised rates to curb inflation, the Bank of Japan maintained ultra-low rates.

Analysis shows that when the US-Japan long-term interest rate gap widens by 1 percentage point, the yen exchange rate rises by 14.6 yen. This reflects investors selling yen to buy dollars for higher yields, demonstrating that the yen’s fate largely depends on the monetary policies of both countries.

Yen’s Real Value at Historic Lows

The yen’s real purchasing power, measured by the Real Effective Exchange Rate (REER), recently hit its lowest level since the 1970s. This means the yen is weaker than during the fixed exchange rate era of 1 dollar = 360 yen, directly impacting Japanese citizens’ quality of life.

Chapter 5: Impact of Yen Weakness on the Korean Economy

What effects does this yen weakness have on us?

Won-Yen Exchange Rate Synchronization

The Korean won and Japanese yen tend to move similarly against the dollar, showing a “synchronization” phenomenon. The recent correlation coefficient between the two exchange rates reached an impressive 0.973, indicating that yen weakness is highly likely to lead to won weakness.

Export Competitiveness and Tourism Balance

A weak yen boosts Japanese products’ price competitiveness globally, burdening Korean exporters. One study found that a 1% drop in the won/yen exchange rate (won appreciation) leads to a 0.49% decrease in Korea’s total export volume.

I personally recently took advantage of the weak yen to travel to Japan and was surprised by the noticeably lower expenses. Thus, yen weakness offers travel opportunities to individuals but casts a shadow of tourism balance deterioration on the national economy.

Chapter 6: Future Outlook and Implications for the Yen

Potential Yen Strengthening with Narrowing US-Japan Interest Rate Gap

Many experts expect the US to lower interest rates while Japan gradually raises them, leading to a narrowing interest rate gap. This is the most important driver for a gradual yen appreciation. Former Vice Minister of Finance Eisuke Sakakibara, known as “Mr. Yen,” predicted the yen could strengthen to around 130 yen per dollar by 2025.

However, structural issues in Japan’s economy and US-Japan trade tensions remain variables, so a gradual rather than sharp rebound is expected.

Conclusion

We have reviewed the turbulent history of the Japanese yen. Here are three key takeaways:

• Product of Policy and Environment: The yen’s value has historically fluctuated dramatically due to government interventions (like the Plaza Accord) and macroeconomic conditions.
• Era of “Bad Weak Yen”: The current “super-weak yen” is mainly caused by the extreme US-Japan interest rate gap and, unlike before, features more import cost burdens than export growth benefits.
• Gradual Strengthening Expected: The yen is expected to gradually strengthen as the interest rate gap narrows, but the path will not be smooth.

Understanding the complex flow of the yen is a crucial key to reading the global economy.