JPY (Japanese Yen): Definition, Symbol, History, Trading

What Is JPY (Japanese Yen)?

JPY is the abbreviation for the Japanese yen, the currency of Japan. The yen is often represented with a symbol that looks like the capital letter Y with two horizontal dashes through the center: ¥.

Understanding JPY (Japanese Yen)

The Japanese yen is the third-most traded currency in the foreign exchange market after the U.S. dollar (USD) and the euro. The yen figured in trades accounting for 16.8% of foreign currency trading turnover in a 2019 survey, compared with more than 88.3% for the dollar and 32.3% for the euro.

The yen is also a distant third behind the U.S. dollar and the euro as the denomination of official foreign exchange reserves, with the reserves held in dollars exceeding those in yen more than 10-fold as of Q4 2021.

Japan's current account surplus stemming from its role as a major net exporter limits the accumulation of yen by foreign central banks.

JPY Denominations

Coins worth 1, 5, 10, 50, 100, and 500 yen are in circulation alongside ¥1,000, ¥2,000, ¥5,000, and ¥10,000 banknotes. The Japanese count sums in multiples of 10,000 yen rather than 1,000 as in the West with U.S. dollars or euros.

Some Japanese yen banknote denominations are scheduled for a redesign by 2024. The new 10,000 yen note is to feature Eiichi Shibusawa, a Japanese industrialist in the 19th and early 20th centuries known as the "father of Japanese capitalism." The 5,000 yen note will feature Umeko Tsuda, who founded Tsuda University in Tokyo, pioneering women's education. The new 1,000 yen note will honor the medical scientist Shibasaburo Kitasato. The new bills will incorporate 3D holograms.

History of the Japanese Yen

The yen's name is a derivative of “en,” the Japanese term for circle, or round object that itself is derived from "yuan," a Chinese term for imported silver coins. The Meiji government adopted the yen in 1871, replacing the metal coinage of the Tokugawa shogunate that preceded it as well as the patchwork of paper scrip issued by many of the country's feudal lords.

The Bank of Japan (BoJ) was created in 1882 as a central bank, and granted sole power to issue currency in 1884, producing its first yen banknote the following year. After a period of steady devaluation against the Canadian and U.S. dollars, Japan followed the U.S. and Canada by adopting the gold standard in 1897.

World War II destroyed the value of the yen, and U.S. occupation authorities after the war imposed a complex web of regulated exchange rates while steadily depreciating the yen against the dollar amid rapid inflation. The yen's value was pegged to the dollar in 1949 but allowed to float in 1973 following the collapse of the Bretton Woods system of fixed currency exchange rates.

The 1985 Plaza Accord agreement led to the managed depreciation of the U.S. dollar that more than doubled the value of the Japanese yen against the dollar by 1988, from ¥239 to ¥123 per $1.

After decades of ensuing deflation, the BoJ has set a 2% inflation target and pursued an aggressive quantitative easing program.

JPY's Safe Haven Status

The Japanese yen has long been considered a safe haven. The currency often appreciates in value during periods of risk aversion in financial markets. Low domestic interest rates in Japan amid deflation have encouraged the country's financial institutions and households to seek out higher yields overseas, a tendency known as the carry trade. When such investment flows reverse in times of market stress, the yen has tended to gain on the U.S. dollar.

In mid-2022, however, the JPY slumped to a 24-year low against the U.S. dollar as the BoJ kept its policy rate near zero while the Federal Reserve raised the federal funds rate to fight high inflation. Rising consumer prices aggravated by the yen's decline had become a political issue in Japan ahead of national elections.

Trading Japanese Yen

Unless you're a savvy currency trader with a strong appetite for risk, it's probably best not to get involved with the yen at any time, especially during periods when it's under pressure. Nevertheless, pros and brave amateurs can trade the yen in the global forex marketplace, which permits a great deal of position leverage and tends to reward in-depth expertise in the issues driving yen trading.

In contrast, yen ETFs offer no leverage, investing in yen-backed assets such as short-term debt and bonds. Though holding yen ETFs does expose one to potentially damaging currency risk.