Japanese Yen

The Japanese yen has been Japan's currency since 1871 and is the third most traded currency in the world after the dollar and the euro. Its written symbol matches the Chinese yuan's because both names trace back to the same character meaning round, as in a round coin.

Japan is one of the world's largest creditor nations: decades of trade surpluses left Japanese households, insurers, and pension funds holding enormous investments abroad. That pool of savings is why the yen carries weight in global markets well beyond Japan's share of world output.

The Bank of Japan issues the yen and sets its interest-rate policy. For most of the past three decades it fought deflation, meaning falling prices, with rates at or near zero and massive bond buying, a policy experiment the rest of the world studied closely.

That long stretch of near-zero rates made the yen the world's favorite funding currency: investors borrowed cheaply in yen to invest elsewhere, a strategy known as the carry trade.

The yen is a moving part in global markets far beyond Japan. When yen borrowing costs rise, carry trades unwind, and that unwinding has amplified selloffs in stocks and other assets, as markets saw in mid-2024.

Japanese institutions are also among the biggest foreign holders of US Treasury bonds. Changes in Japanese rates can pull that money home, nudging US yields, which is one of the quieter links between Tokyo and every borrowing rate in America.

Japan spent most of the 1990s through the 2010s fighting deflation rather than inflation, an unusual problem in which prices fall and people delay spending. Inflation returned after 2022, which is part of why the Bank of Japan finally moved away from zero rates.

The weak yen of recent years cut Japanese purchasing power abroad in a very visible way: imports and foreign travel became far more expensive for Japanese households even while prices at home rose modestly. It is a vivid example of how exchange rates and inflation are different things that both affect what money buys.

Dollar-yen is one of the most traded currency pairs in the world. The yen moved from roughly 100 to 110 per dollar through much of the 2010s to weaker than 150 per dollar in the mid-2020s, as US interest rates rose far above Japanese rates.

Because the rate gap dominates this pair, dollar-yen is often the cleanest illustration of how monetary policy moves currencies: when the gap has widened the yen has tended to weaken, and when it has narrowed the yen has tended to recover. Tendencies are not promises, and exchange rates move constantly.