ECONOMICS
Why Is the U.S. Dollar Worth So Much More Than the Japanese Yen?
Fukunosuke Yamaryo · Jul 1, 2026
01
Understanding the Question
Today’s question is straightforward but important: Why is the U.S. dollar worth so much more than the Japanese yen?
Welcome to Poli-Talk. My name is Fukunosuke, and I am a Japanese high school student living in California. Here, I examine politics, economics, and international affairs through everyday questions that shape how I understand the world.
The question for this episode: Why is the U.S. dollar worth so much more than the Japanese yen?
This question feels especially relevant to me as a Japanese person living in California, where the cost of living is extremely high and the difference between currencies can feel very real in daily life.
When I lived in Japan, I often heard news reports describing the yen as “stronger” or “weaker,” usually with concern over the latter.
However, what does that description actually mean?
To begin, it is useful to ask a related question: Is the U.S. dollar inherently superior to the Japanese yen? The answer is not necessarily.
Many people assume that because one dollar is currently worth approximately 150 or 160 yen, the dollar must simply be the stronger or better currency.
However, exchange rates do not work in that way. A larger numerical value does not automatically indicate a better currency.
For example, if Japan were to announce that 1,000 old yen would become one new yen overnight, the exchange rate would appear completely different. Yet Japan itself would not suddenly become wealthier.
A similar point can be illustrated through a unit of measurement.
If a new unit, for instance a “Spud,” equaled 0.1 centimeters, then a person who is 180 centimeters tall would be 1,800 Spuds tall. The number would sound more impressive, but the actual height would not change.
The crucial issue, therefore, is not the number itself, but what the currency represents: purchasing power, interest rates, trade patterns, inflation, and the level of trust placed in the currency.
“The number would sound more impressive, but the actual height would not change.”
The crucial issue, therefore, is not the number itself, but what the currency represents: purchasing power, interest rates, trade patterns, inflation, and the level of trust placed in the currency.
02
Bretton Woods and the 360-Yen Dollar
To understand the modern value of the yen, it is necessary to return to the postwar monetary order established in 1944 at Bretton Woods, New Hampshire.
Although the location may seem remote, the conference held there became one of the most important events in the history of international finance.
Near the end of World War II, Allied nations gathered in Bretton Woods to construct a new international monetary framework designed to promote exchange-rate stability and postwar reconstruction (Federal Reserve History; IMF).
Under this system, the U.S. dollar occupied a central position. The dollar was fixed to gold, while other major currencies were fixed to the dollar, making the dollar the principal link between national currencies and gold.
Because Japan had been defeated in the war, it did not initially participate in the system on equal terms.
In 1949, however, Japan’s exchange rate was fixed at 360 yen to one U.S. dollar.
A fixed exchange rate means that the relative value of the currency is maintained at a specific level rather than freely moving in response to market conditions.
Compared with today’s exchange rate, 360 yen to one dollar may appear extremely low. Yet, as discussed earlier, a numerically “cheap” currency is not necessarily disadvantageous.
A larger exchange-rate number does not by itself indicate a stronger economy. For Japan, the weak yen became an important export advantage.
Japanese products became more affordable for overseas consumers, especially in the United States.
Because the dollar had significantly greater purchasing power relative to the yen, American consumers could buy Japanese cars, cameras, electronics, and machinery at competitive prices. This helped Japanese export industries expand rapidly.
The United States became one of Japan’s most important export markets, and the fixed weak yen contributed significantly to Japan’s postwar economic growth.
This exchange-rate arrangement helps explain the global rise of Japanese manufactured goods, including automobiles, although the fixed-rate system itself would not endure indefinitely.
03
The Nixon Shock
In 1971, the international monetary system changed dramatically with the event commonly known as the Nixon Shock.
The dollar had been treated as equivalent to gold within the Bretton Woods framework, but by the late 1960s the United States faced growing pressure because the supply of dollars circulating globally had expanded substantially.
This created increasing concern about whether the United States possessed enough gold reserves to maintain the dollar’s convertibility.
The expansion of dollar circulation reflected both the growing role of the dollar in international trade and the fiscal pressures associated with U.S. government spending during this period.
At the same time, U.S. spending on the Vietnam War placed additional pressure on the federal budget, intensifying international doubts about whether the United States could fully back the expanding global supply of dollars with gold.
This concern was significant because the credibility of the system depended on the assumption that dollars remained convertible into gold.
In 1971, President Richard Nixon ended the dollar’s convertibility into gold, a decision widely understood as marking the beginning of the end of the Bretton Woods system (Federal Reserve History).
As a result, the Bretton Woods system effectively came to an end.
Japan’s fixed exchange-rate arrangement also disappeared, and the yen began to appreciate against the dollar.
This shift marked the beginning of a more flexible and volatile foreign-exchange environment.
04
Why the Yen Appreciated
The central question, then, is why the yen appreciated after the collapse of the fixed-rate system.
As noted earlier, a currency’s value is shaped not merely by its numerical exchange rate but by confidence in the country’s economy, its interest-rate environment, and its role in global trade and finance.
At the time, Japan’s economy was widely regarded as dynamic and competitive, while Japanese interest rates were considerably higher than they are today. These conditions made yen-denominated assets comparatively attractive to both investors and market participants.
Although an appreciating currency may seem positive, it can create significant difficulties for export-oriented industries.
As the yen rose in value, Japanese exports became more expensive abroad, weakening the price advantage that had supported earlier export growth.
Nevertheless, this did not immediately halt Japan’s economic expansion.
Even after the Nixon Shock, Japan’s economy continued to grow.
One reason was that Japanese industries increasingly invested in product quality, technological improvement, and production efficiency.
However, Japan’s growing competitiveness created economic and political tension with the United States.
By the 1980s, the United States was running a substantial trade deficit with both Japan and West Germany.
In response, U.S. policymakers sought a depreciation of the dollar in order to reduce external imbalances and improve American export competitiveness.
This historical pattern also illustrates how debates over trade deficits, exchange rates, and industrial competitiveness can reappear across different political eras.
05
The Plaza Accord
In 1985, the United States, Japan, West Germany, France, and the United Kingdom met at the Plaza Hotel in New York to coordinate exchange-rate policy in response to global trade and currency imbalances (Ito; Obstfeld).
This agreement became known as the Plaza Accord.
Through this agreement, the participating governments sought to depreciate the U.S. dollar relative to the Japanese yen and the German Deutsche Mark. As a result, the yen appreciated rapidly once again.
Japan subsequently entered what became known as the strong-yen recession.
To mitigate the contractionary effects of the stronger yen, Japanese policymakers lowered interest rates.
In general, higher interest rates tend to increase demand for a currency by making assets denominated in that currency more attractive, while lower interest rates can place downward pressure on its value.
Over time, Japan adopted an exceptionally low-interest-rate environment, reflecting concerns about weak growth and deflationary pressure.
06
The Bubble Economy and the Lost Decade
This policy environment had important consequences for borrowing and investment behavior.
Lower borrowing costs encouraged households, firms, and investors to take on greater levels of debt.
Much of this borrowing was directed toward asset markets, particularly real estate.
As credit expanded, land prices rose sharply.
The scale of the boom was often illustrated through exaggerated comparisons, such as the claim that the land beneath the Imperial Palace in Tokyo was worth more than all the land in California.
Although such comparisons were partly rhetorical, they captured the extraordinary degree of asset-price inflation during Japan’s bubble economy.
This period is now commonly referred to as Japan’s asset-price bubble.
After the asset-price bubble burst, Japan entered what is commonly described as the Lost Decade, a prolonged period of weak growth, financial-sector stress, and deflationary pressure (Bank of Japan; IMF).
After the bubble collapsed, Japan experienced a prolonged period of economic stagnation rather than a quick return to rapid growth.
This history demonstrates how exchange-rate policy, monetary policy, export competitiveness, and asset markets can interact over time.
07
Returning to the Original Question
Returning to the opening question, the U.S. dollar is not simply “better” than the Japanese yen because one dollar equals many yen.
Rather, the current exchange-rate relationship reflects a long history of institutional arrangements, policy decisions, international agreements, inflation dynamics, interest-rate differences, and market confidence.
In this sense, the dollar-yen exchange rate is best understood not as a simple ranking of currencies, but as the outcome of historical and economic forces that continue to shape both countries’ economies.
“In this sense, the dollar-yen exchange rate is best understood not as a simple ranking of currencies, but as the outcome of historical and economic forces that continue to shape both countries’ economies.”
Thank you for reading, and I hope this discussion provides a clearer framework for understanding why exchange rates matter beyond the numbers themselves.
SOURCES
References
Okina, K., Shirakawa, M., & Shiratsuka, S. (2001). The asset price bubble and monetary policy: Japan’s experiencein the late 1980s and the lessons. Monetary and Economic Studies, 19(S1), 395–450.
Ghizoni, S. K. (n.d.). Creation of the Bretton Woods System. Federal Reserve History. https://www.federalreservehistory.org/essays/bretton-woods-created
Ghizoni, S. K. (n.d.). Nixon ends convertibility of U.S. dollars to gold and announces wage/price controls. Federal Reserve History. https://www.federalreservehistory.org/essays/gold-convertibility-ends
De Vries, M. G. (1986). The IMF in a changing world, 1945–85. International Monetary Fund. https://doi.org/10.5089/9780939934652.071
Leigh, D. (2009). Monetary policy and the Lost Decade: Lessons from Japan (IMF Working Paper No. 09/232). International Monetary Fund. https://doi.org/10.5089/9781451873795.001
Ito, T. (2015). The Plaza Agreement and Japan: Reflection on the 30th year anniversary [Working paper]. James A. Baker III Institute for Public Policy, Rice University.
Obstfeld, M. (2009). Time of troubles: The yen and Japan’s economy, 1985–2008 (NBER Working Paper No. 14816). National Bureau of Economic Research. https://doi.org/10.3386/w14816