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Tuesday | December 2, 2014

Special Report on Japanese Yen

Anish Vyas Research Analyst Non-Agri Commodities and [email protected] (022) 3935 8104

Angel Commodities Broking Pvt. Ltd. Registered Office: G-1, Ackruti Trade Centre, Rd. No. 7, MIDC, Andheri (E), Mumbai - 400 093. Corporate Office: 6th Floor, Ackruti Star, MIDC, Andheri (E), Mumbai - 400 093. Tel: (022) 2921 2000 CX Member ID: 12685 / FMC Regn No: MCX / TCM / CORP / 0037 NCDEX : Member ID 00220 / FMC Regn No: NCDEX / TCM / CORP / 0302

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Tuesday | December 2, 2014

Introduction

The Japanese Yen which is the official of is the third most traded currency in foreign exchange after United States and . It is used as most widely reserved currency after US Dollar, Euro and Sterling Pound.

Symbol Code

Yen is pronounced as “en” in Japanese, which means “round” in Japan similar to that as “” in and “won” in Korea. Initially, Chinese use to trade in mass silver and when Spanish and Mexican silver coins arrived the Chinese used to term as silver round known for their circular shapes.

The spelling and pronunciation in Standard English is referred as “yen”. It is because mainly English speaking people who visited Japan during the end of and early period spelled it that way. In the 16th century, Japanese and Portuguese missionaries used to spell them as “ye”. In 18th century, , who had not come to Japan and met any Japanese, had consulted mainly a Japanese-Dutch dictionary, spelled some "e" as "ye" in an English and Japanese, and Japanese and English Vocabulary. In the early Meiji era, James Curtis Hepburn, following Medhurst, spelled all "e" as "ye" in a Japanese and English dictionary. 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 of "ye" to "e" in the 3rd edition in order to mirror the contemporary pronunciation, except "yen".

History

 How Yen came into existence

In the 19th century, silver coins were common throughout Southeast , Chinese coast and Japan. These coins were introduced through over a period of two hundred and fifty years, arriving on ships from in and those ships were known as the Manila galleons. Until the 19th century, these silver dollar coins were actual Spanish minted in the new world, mostly at . But from the 1840, they were replaced by silver dollars of the new Latin American republics. In the latter half of the 19th century, some local coins in the region were made similar to that of . The first of these local silver coins was the Hong Kong silver dollar that was minted in Hong Kong between the years 1866 and 1869. The Chinese were slow to accept unfamiliar coinage and preferred the familiar Mexican dollars, and so the Hong Kong government ceased minting these coins and sold the machinery to Japan.

The Japanese then decided to adopt a silver dollar coinage under the name of 'yen'. The yen was officially adopted by the Meiji government in an Act signed on 10th May 1871. The new currency was gradually introduced beginning from July of the same 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. The yen replaced Tokugawa coinage, a complex monetary system of the Edo period. The New Currency Act of 1871

stipulated the adoption of the decimal accounting system of yen with the coins being round and 2

manufactured using Western machinery. The yen was legally defined as 0.78 troy ounces (24.26 g) of Page

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pure silver, or 1.5 grams of pure gold (as recommended by the European Congress of Economists in in 1867.

Following the silver devaluation of 1873, the yen devalued against the US dollar and the units since they adhered to a , and by the year 1897 the yen was worth about $0.50. In that year, Japan adopted a gold exchange standard and hence froze the value of the yen at $0.50. This remained in place until Japan left the gold standard in December 1931, after which the yen fell to $0.30 by July 1932 and to $0.20 by 1933. It remained steady at around $0.30 until the start of the Second World War on December 7, 1941, at which time it fell to $0.23.

 Fixed Value of Yen to the DX

Between 7th December 1941 and 25th April 1949 no true exchange rate existed for the yen and wartime inflation reduced the yen to a fraction of its pre-war value. After a period of instability, on 25th April 1949 the US government fixed the value of the yen at 360 Yen (¥360) per $1 through a plan, which was part of the , to stabilize in the Japanese economy. That exchange rate was maintained until 1971, when the US abandoned the gold standard, which had been a key element of the Bretton Woods System, and imposed a 10 percent surcharge on imports, setting in motion changes that eventually led to floating exchange rates in 1973.

 Undervaluing of Yen

In the year of 1971, the yen became undervalued. Japanese exports were costing too little in international markets, and imports from abroad were too costly for the Japanese economy. This undervaluation was reflected in the current account balance, which had risen from the deficits in the early 1960 to a large surplus of $5.8 billion in 1971. The belief that the yen, and several other major currencies, were undervalued motivated the US to take actions in 1971.

 Yen and major floating currencies

The US took measures in summer of 1971 to devalue its dollar and the Japanese government agreed to a new fixed exchange rate as part of the , which was later signed by the end of that year. This agreement set the exchange rate at 308 Yen (¥308) per $1. However, the new fixed rates of the Smithsonian Agreement were difficult to maintain the 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.

 Japanese government intervention in the currency market

In the year of 1970, Japanese government and business persons were 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 of the country. The government then continued to intervene heavily in even after the 1973 decision to allow the yen to float.

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Despite intervention, market pressures caused the yen to continue climbing in value, peaking at an average of 271 Yen (¥271) per $1 in 1973 before the impact of oil crisis was seen in 1973. The increased costs of imported oil caused yen to depreciate to a range of 290 Yen (¥290) to 300 Yen (¥300) between 1974 and 1976. The re-emergence of trade surplus drove the yen back up to 211 Yen (¥211) in 1978. This currency strengthening was again reversed by second oil shock in 1979 which dropped the yen to 227 Yen (¥227) by 1980.

 Yen in early 1980’s

During the first half of the 1980, the yen failed to increase its value in spite of current account surplus. From 221 Yen (¥221) in 1981, the average value of the yen actually dropped to 239 Yen (¥239) 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 difference in interest rates with US interest rates much higher than those in Japan, and the constant moves to deregulate the international flow of capital, led to a large net outflow of capital from the Japan. The capital flow increased the supply of yen in foreign-exchange markets, as Japanese investors changed their preference from yen to other currencies which were mainly dollars and invested in overseas market. This kept the yen weak relative to the dollar and fostered the rapid rise in the Japanese trade surplus that took place in the 1980.

In 1985 a dramatic change was seen and officials from major nations signed an agreement known as the Plaza Accord affirming that the dollar was overvalued and, therefore, the yen was 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 Yen (¥239) per $1 in 1985, the yen rose to a peak of 128 Yen (¥128) in 1988. After declining in 1989 and 1990, it reached a new high of 123 Yen (¥123) to $1 in December 1992. In April 1995, the yen hit a peak of under 80 yen per a single dollar, temporarily making Japanese economy near to that the size of US.

 Post bubble years

The yen declined during the Japanese asset bubble and continued to do so afterwards, reaching a low of 134 Yen (¥134) to $1 in February 2002. The of Japan's policy of zero interest rates has discouraged yen investments with the trade of investors borrowing yen and investing in better- paying currencies estimated to be around $1 trillion. In February 2007, Economist estimated that the yen was 15 percent undervalued against the dollar, and 40 percent undervalued against the euro.

 Yen post global economic crisis of 2008

The trend of depreciation reversed after the global economic crisis of 2008. Other major currencies except the Swiss have been declining relative to the yen. On 4th April 2013, announced that they would expand their Asset Purchase Program by $1.4 trillion in next two years. The Bank of Japan hopes to bring Japanese economy out of deflation to inflation, aiming for 2 percent

inflation. The amount of purchases was so large that it is expected to double the money supply. But this

move has sparked concerns that the authorities in Japan deliberately devalued yen in order to boost

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export. However, the commercial sector in Japan worried that the devaluation would trigger an increase in import prices, especially in energy and raw materials.

Coins and of Japanese Yen

In the year of 1870 coins were introduced in Japan. There were silver 5, 10, 20 and 50 sen, 1 yen and gold 2, 5, 10 and 20 yen. Gold 1 yen were introduced in the year of 1871, followed by copper 1 rin, 0.5, 1 and 2 sen in 1873. 1 Yen silver coin was equivalent to .900 grams of pure silver minted in 1901 in Japan. In 1889, cupro- 5 sen coins were introduced and in 1897, the silver 1 yen coin was demonetized and the sizes of the gold coins were reduced by 50 percent, with 5, 10 and 20 yen coins issued. In 1920, cupro-nickel 10 sen coins were introduced.

Production of silver coins ceased in 1938, after which a variety of base metals were used to produce 1, 5 and 10 sen coins during the Second World War. Clay 5 and 10 sen coins were produced in 1945 but not issued for circulation. After the war, brass 50 sen, 1 and 5 yen were introduced between 1946 and 1948. In 1949, the current type of holed 5 yen was introduced, followed by bronze 10 yen in 1951. Coins in denominations of less than 1 yen became invalid on December 31, 1953, following enforcement of the Small Currency Disposition and Fractional Rounding in Payments Act. In 1955 the current type of aluminium 1 yen was introduced, along with nickel 50 yen without hole. In 1957, silver 100 yen pieces were introduced. These were replaced in 1967 by the current, cupro-nickel type, along with the holed 50 yen coin. In 1982 the first 500 yen coins were introduced.

In April 2011, the was the highest-valued coin to be used regularly in the world with value of over $6. Because of this high face value, the 500 yen coin was a favourite target for counterfeiters; it was counterfeited to such an extent that in 2000 a new series of coins was issued with various security features, but counterfeiting continued. The 1 yen coin is made out of 100 percent aluminium and can float on water if placed correctly.

On various occasions, commemorative coins are minted, often in gold and silver with face values up to 100,000 yen. The first of these were silver 100 and 1000 Yen (¥100 & ¥1000) Summer Olympic coins issued on the occasion of the 1964 games. This practice is undertaken with the 500 yen coin, the first two types were issued in 1985 in commemoration of the science and technology exposition in Tsukuba and the 100th anniversary of the Governmental Cabinet system. The current commemorative 500 and 1000 yen coin series honouring the 47 commenced in 2008, with 47 unique designs planned for each . Only one coin per customer is available from in each prefecture. 100,000 of each 1000 yen silver coin have been minted. Even though all commemorative coins can be spent like ordinary (non-commemorative) coins, they are not seen often in typical daily use and normally do not circulate.

Instead of displaying the CE year of mintage like most nations' coins, yen coins instead display the year of the current emperor's reign. The issuance of the yen banknotes began in 1872, two years after the currency was introduced. Throughout its history, the denominations have ranged from 10 yen to 10000

yen.

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Before and during Second World War, various bodies issued banknotes in yen, such as the Ministry of Finance and the Imperial Japanese National Bank. The Allied forces also issued some notes shortly after the war. Since then, the Bank of Japan has been the exclusive note issuing authority. The bank has issued five series after Second World War. Series E, the current series, consists of ¥1000, ¥2000, ¥5000, and ¥10,000.

Determinants of Value

From the beginning of 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 , 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.

Since the 1990s, the Bank of Japan, the country's , 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 percent to 1.3 percent 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. This has helped to keep the value of the yen low compared to other currencies.

International

(SDR) Basket

The SDR valuation is an International Monetary Fund (IMF) basket of currencies, including the Japanese yen. The SDR is linked to a basket of currencies with 41.9 percent for the Dollar, 37.4 percent for the Euro, 11.3 percent for the , and 9.4 percent for the Yen since 2011. The percentage for the yen has however declined from 18 percent in 2000. The exchange rate for the Japanese yen is expressed in terms of currency units per US Dollar, other rates are expressed as US dollars per currency unit. The SDR currency value is calculated daily and the valuation basket is reviewed and adjusted every five years. The SDR was created in 1969 to support the fixed exchange system.

Current Scenario

 New Steps taken by government

After the disasters of tsunami in Japan, the central government has constantly taken many measures to improve the condition of the economy. In early October 2010, the Bank of Japan (BOJ) announced that it would examine the purchase of 5 trillion Yen ($60 billion) in assets. This was an attempt to push down the value of the yen against the US dollar in order to stimulate the domestic economy by making Japanese exports cheaper; but unfortunately it didn’t work.

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On 4th August 2011, the BOJ announced a unilateral move to increase the commercial bank current account balance from 40 trillion Yen ($504 billion) to a total of 50 trillion Yen ($630 billion). In October 2011, the Bank expanded its asset purchase program by 5 trillion Yen ($66 billion) to a total of 55 trillion Yen.

On 4th April 2013, the Bank of Japan announced that it would expand its asset purchase program by $1.4 trillion in two years. The Bank hoped to bring Japan from deflation to inflation, aiming for 2% inflation. The amount of purchases was so large that it was expected to double the money supply. This policy has been named , as a portmanteau of economic policies and Shinzō Abe, the current .

 Recent Developments and Depreciation

The Bank of Japan shocked the global financial markets on 31st October 2014 by expanding its massive stimulus spending in an attempt to improve economic growth and picking up of inflation in the country. Further, estimates of hike in sales taxes which was last done in April led to sharp depreciation in the currency. The Japanese Yen touched at the lowest level of 118.96-mark since September 2007.

The central bank in its split decision voted 5-4 to accelerate the purchases of Japanese government bonds so that its holdings increase at an annual pace of 80 trillion Yen ($723.4 billion) which was up from 30 trillion Yen.

Going Forward and Expectations

Coming to the future scenario of Japanese Yen, it is estimated that the Bank of Japan will continue with its loose and constant stimulus measures until the inflation target of 2 percent is not met which will act as a negative factor for the currency. Concerns of Japanese economy going in recession and slow economic growth in the country are leading to sharp depreciation in the Japanese Yen.

Further, improvement in global and developed economies and Japanese Yen sharing an inverse relationship with the equity markets will exert downside pressure to the currency. Worries for the stability of the current government headed by Mr. Shinzo Abe will lead to worst effects for depreciation

in the Japanese Yen.

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