South-Western College Publishing - Economics  
Fewer Zeros for Japan
Subject International Currency
Topic International Finance
Key Words Yen, international currency, euro, exchange rate
News Story

Mikio Aoki, Japan's chief government spokesman, announced that Japan was considering changing the denomination of the nation's currency dropping two zeros in the yen. Japan's efforts to promote the yen as an international currency have become more intense with the advent of euro, the European Economic Union's currency. The proposed change is largely cosmetic neither the exchange rate nor the purchasing power of the yen (minus the zeros) is predicted to change significantly.

Under the Japanese government's plan, 100 yen would become one yen. The dollar/yen exchange rate of 105.93 would become 1.0593 yen to the dollar, putting the yen on a par with both the dollar and the euro. Domestic prices in Japan would decrease proportionately something selling for 1,000 yen before the change would now sell for 10 new yen. By changing the currency, Japan hopes that the change will make the yen more desirable as an international currency. With the globalization of the marketplace and the liquid markets for both the dollar and the euro, Japan hopes that the denomination change will lessen the possibility of the yen becoming a "second-rate currency".

There are some economic costs to the proposed conversion. New currency would have to be printed and that entails printing and engraving costs. Firms would have to change software, invoices and accounting practices to accommodate the change.

Japan is not the only country that has changed its currency. France has changed the franc, Israel has replaced pounds with shekels and shekels for new shekels, and Argentina replaced pesos with australes and then returned to pesos. Brazil has had six different currencies between 1984 and 1994.

(Updated January 1, 2000)

Questions
1. What is "money"? List 3 purposes that money serves.
2. Is the current currency still serving these purposes in Japan? Why is there a need for a change?
3. What determines the exchange rate between the dollar and the yen? Would changing the denomination of the yen affect any of these determinants?
4. Some people have objected to the change arguing that consumer spending on products such as software and computers would be reduced. Is this a legitimate fear? What would happen to Japan's economy if this fear materialized?
Source Stephanie Strom, "Looking Outward, Japan Again Considers a Simpler Yen," The New York Times, November 19, 1999.

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