The Japanese yen (sign: ¥; code: JPY) is the official currency of Japan. It is the third most-traded currency in the foreign exchange market after United States dollar and the euro. It is also widely used as a reserve currency after the U.S. dollar, the euro and the pound sterling.
The Japanese then decided to adopt a silver dollar coinage under the name of 'yen', meaning 'a round object'. The yen was officially adopted by the Meiji government in an Act signed on May 10, 1871. The new currency was gradually introduced beginning from July of that year. The yen was therefore basically a dollar unit, like all dollars, descended from the Spanish Pieces of eight, and up until the year 1873, all the dollars in the world were more or less the same value.
The yen replaced Tokugawa coinage, a complex monetary system of the Edo period based on the mon. The New Currency Act of 1871 stipulated the adoption of the decimal accounting system of yen (yen 1), sen (1⁄100 ), and rin (1⁄1000), with the coins being round and cast as in the West. The yen was legally defined as 0.78 troy ounces (24.26 g) of pure silver, or 1.5 grams of pure gold hence putting it on a bimetallic standard. (The same amount of silver is worth about 1181 modern yen, while the same amount of gold is worth about 4715 yen.)
Following the silver devaluation of 1873, the yen devalued against the US dollar and the Canadian dollar units since they adhered to a gold standard, and by the year 1897 the yen was worth only about 50 cents(US). In that year, Japan adopted a gold exchange standard and hence froze the value of the yen at 50 cents. (The sen and the rin were eventually taken out of circulation at the end of 1953.)
Beginning in December 1931, Japan gradually shifted from the gold standard system to the managed currency system.The relative value of the yen is determined in foreign exchange markets by the economic forces of supply and demand. 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).
Since the 1990s, the Bank of Japan, the country's central bank, has kept interest rates low in order to spur economic growth. Short-term lending rates have responded to this monetary relaxation and fell from 3.7% to 1.3% between 1993 and 2008. Low interest rates combined with a ready liquidity for the yen prompted investors to borrow money in Japan and invest it in other countries (a practice known as carry trade). This has helped to keep the value of the yen low compared to other currencies.
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