Introduction

• The yen is the official currency of Japan. The Japanese currency is one of the most widely held reserves, and traded currencies in the world. Next to the US Dollar, the Euro and the Pound Sterling, it is heavily used to facilitate trade and commerce.
• According to the last BIS survey, the value of average daily turnover of the Japanese yen in the foreign exchange market is approximately US$ 755 billion.

Deregulation of the Yen

• Between 1949 and 1971, under the Bretton Woods system, the value of the yen was pegged at ¥ 360 per US dollar.
• By 1971 the yen had become undervalued, so the Japanese government agreed to a new, fixed exchange rate at ¥ 308 per US$1 as part of the Smithsonian Agreement.
• 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.

• Like other major currencies, the Japanese currency is affected by relative growth, the inflation differential, current account deficit/surplus, interest rate differentials, equity flows, and labour and unemployment.
• The supply of the yen in the market is governed by the desire of yen holders to exchange their yen for other currencies to purchase goods, services, or assets.
• The demand for the yen is governed by the desire of foreigners to buy goods and services in Japan and by their interest in investing in Japan (buying yen-denominated real and financial assets).
• In the last few years, the value of the Japanese yen has been affected by the unwinding of the carry trade. This, coupled with a weakening US dollar following the recent financial crisis, has strengthened the value of the yen against the US dollar.