JEI's Spin on the News

Yen Redenomination Idea Is Back

Wednesday, November 24, 1999

A currency is a powerful national symbol, closely associated with the country in which it is used. This is true for both the American dollar and the Japanese yen. Some Japanese see the value of the Japanese currency, which for decades traded at ¥360 to the dollar, as symbolizing the weakness and insignificance of the country even when, as it did briefly in 1995, it soared to "only" ¥80=$1.00. This symbolism may be augmented by the fact that the single yen coin is a small,light, almost worthless object whose appearance suffers in contrast to the regal looking greenback.

Symbolism seems behind periodic efforts to "redenominate" the value of the yen. Under most such proposals, a "new" yen would be worth exactly 100 times as much as the existing yen, meaning that at recent exchange rates, one dollar would equal ¥1.04 or so rather than ¥104. In other words two zeros would be lopped of the price of everything, including the yen itself when compared against foreign currencies such as the dollar. A can of soda in Japan which currently costs ¥100 would cost ¥1 after redenomination. An hourly wage of ¥900 would become a wage of ¥9. Redenomination is a different idea than revaluation, although both relate to changes in the values of international currencies to each other. Under redenomination, but not revaluation, domestic prices are recalibrated to exactly the same extent as exchange rates.

In contrast to revaluation, redenomination would have no effect on the competitiveness of Japanese goods. Although under redenomination, exporters, for example, would get only one yen for every one hundred they used to get in exchange for dollars, their costs, dividends, balance sheets and everything else would be trimmed by the same percentage.

So why bother? A good question, with no adequate answer. National pride is one response. Convenience is another. The problems of jarfuls of one yen pieces would disappear, but that difficulty might be replaced by another if authorities introduced coinage of less than one yen, as they did in the prewar years when the yen was worth far more. International comparisons of prices and economic data might be a little easier. Against those modest benefits, the costs of reconfiguring ATM machines, vending machines, cash registers, and computers would be enormous, running into the equivalent of millions, if not billions, of dollars. Moreover, all of Japan's money would have to be replaced, incurring printing and minting costs and countless hours on the part of banks, companies and individuals.

Ironically, cost is given as a reason for embarking on this bizarre endeavor. Wako Research Institute says the activity would boost gross domestic product by 0.8 percent. Redenomination may spur economic demand, but it also creates economic disruption, with few, if any, lasting economic benefits. If boosting the economy is necessary, most economic analysts on this side of the Pacific would say a preferable alternative would be to dig holes and then fill them up again. In contrast to redenomination, the holes project creates no serious dislocation provided the job is done competently, and does not involve luring skilled computer programmer labor away from more worthwhile pursuits.

Although this argument implies that the redenomination policy should have stayed buried, the ruling coalition in government seems to think it is a good idea, perhaps because nationalist sentiment has increased or because redenomination seems like a quick fix to the nation's economic difficulties. Expect to hear more about it.

"JEI's Spin on the News" are the opinions of one of more members of JEI's staff and do not necessarily represent the views of the organization.

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