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Japan The Value of the Yen
The relative value of the yen is determined in foreign
exchange
markets by the 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).
In 1949 the value of the yen was set at ¥360 per US$1
through
a United States plan, which was part of the Bretton Woods
System,
to stabilize prices in the Japanese economy. That exchange
rate was
maintained until 1971, when the United States abandoned
the
convertibility of the dollar to gold, 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.
By 1971 the yen had become undervalued (see
table 33,
Appendix). Japanese exports were costing too little in
international markets, and imports from abroad were
costing the
Japanese too much. This undervaluation was reflected in
the current
account balance, which had risen from the deficits of the
early
1960s to a then-large surplus of US$5.8 billion in 1971.
The belief
that the yen, and several other major currencies, were
undervalued
motivated the United States actions in 1971.
Following the United States measures to devalue the
dollar in
the summer of 1971, the Japanese government agreed to a
new, fixed
exchange rate as part of the Smithsonian Agreement, signed
at the
end of the year. This agreement set the exchange rate at
¥308 per
US$1. 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.
In the 1970s, Japanese government and business people
were very
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. The government therefore
continued to
intervene heavily in foreign-exchange marketing (buying or
selling
dollars), even after the 1973 decision to allow the yen to
float.
Despite intervention, market pressures caused the yen
to
continue climbing in value, peaking temporarily at an
average of
¥271 per US$1 in 1973 before the impact of the oil crisis
was felt.
The increased costs of imported oil caused the yen to
depreciate to
a range of ¥290 to ¥300 between 1974 and 1976. The
reemergence of
trade surpluses drove the yen back up to ¥211 in 1978.
This
currency strengthening was again reversed by the second
oil shock,
with the yen dropping to ¥227 by 1980.
During the first half of the 1980s, the yen failed to
rise in
value even though current account surpluses returned and
grew
quickly. From ¥221 in 1981, the average value of the yen
actually
dropped to ¥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 differential in interest rates, with United States
interest
rates much higher than those in Japan, and the continuing
moves to
deregulate the international flow of capital, led to a
large net
outflow of capital from Japan. This capital flow increased
the
supply of yen in foreign-exchange markets, as Japanese
investors
changed their yen for other currencies (mainly dollars) to
invest
overseas. This kept the yen weak relative to the dollar
and
fostered the rapid rise in the Japanese trade surplus that
took
place in the 1980s.
In 1985 a dramatic change began. Finance officials from
major
nations signed an agreement (the Plaza Accord) affirming
that the
dollar was overvalued (and, therefore, the yen
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 per US$1 in 1985, the yen rose to a peak of ¥128 in
1988,
virtually doubling its value relative to the dollar. After
declining somewhat in 1989 and 1990, it reached a new high
of ¥123
to US$1 in December 1992.
The yen's increased value made Japanese exports less
price
competitive and imports more price competitive, which
should have
brought down the value of trade and current account
surpluses. The
current account figures discussed earlier, however,
indicated that
such a response was slow. The strong appreciation of the
yen began
in 1985, but the current account continued to rise until
1987. Its
decline in 1988 was rather small, although it experienced
a more
substantial decline in 1989.
Data as of January 1994
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