by Kosuke Takahashi
June 11, 2012
Kosuke Takahashi, "Japan and
China Bypass US in Direct Currency Trade," The Asia-Pacific Journal,
Vol 10, Issue 24, No 3, June 11, 2012.
Kosuke TAKAHASHI is a
Tokyo-based Japanese journalist. He currently works as Tokyo
correspondent for Asia Times Online and IHS Jane's Defence Weekly.
He also served as TV commentator for Nikkei CNBC (news television
channel broadcast in Japan) from March 2009 to March 2012. He
graduated from Columbia University's Graduate School of Journalism
and the School of International and Public Affairs as a dual
master's degree student. His twitter is @TakahashiKosuke
Japan and China started direct trading of their currencies, the yen and
the yuan, on the inter-bank foreign exchange markets in Tokyo and Shanghai
on June 1 (2012) in an apparent bid to strengthen bilateral trade and
investment between the world's third- and second-largest economies.
Direct yen-yuan trades also aim to hedge the risk of the dollar's fall in
the long run as the world's key settlement currency and as the main reserve
currency in Asia, the world's economic growth center in the 21st
By skipping the dollar in transactions, the
region's two biggest economies indicate their intention to reduce their
dependence on dollar risk and US monetary authorities' leeway and prowess on
the Asian economy.
The move aids China's goal of undercutting US
influence in the region while strengthening China-Japan financial ties.
Comparison of Japanese,
Chinese and American currency.
This is the first time that China has allowed a
major currency other than the dollar to directly trade with the yuan.
For Beijing, this new step brings benefits of
further internationalization of the yuan. For Tokyo, direct trading confers
a favor of incorporating China’s dynamic growth more effectively and
The possible future correction of China's still
artificially undervalued yuan may also result in a weaker yen, boosting
the competitiveness of Japanese exporters such as Toyota and Sony in the
Japan's three megabanks,
...all began direct yen-yuan trades with major
Chinese banks on June 1.
Exchange rates between the yen and the yuan are
determined by their transactions, delinking the current "cross rate" system
in which the US dollar intermediates in setting yen-yuan rates.
"We can lower transaction costs and reduce
settlement risks at financial institutions as well as making both
nations' currencies more useful and energizing the Tokyo market,"
Japan's Finance Minister Azumi Jun said on May 29.
China also welcomed the new trading agreement.
"This will help lower currency conversion
costs for economic entities, facilitate the use of RMB [the renminbi,
another name for the Chinese currency] and Japanese yen in bilateral
trade and investment, promote financial cooperation and enhance economic
and financial ties between the two countries," the People's Bank of
China (central bank) said in a statement.
Direct trading between the yuan and the yen is
part of a broad agreement reached during the summit last December in Beijing
to reinforce financial ties between Asia’s two most powerful nations.
It appears that business is business.
The heightened tension between the two nations
in recent years did not prevent this new dealing in the financial community,
even after China gave Tokyo a diplomatic brush-off, cancelling a string of
VIP visits with Japan in the wake of Uighur exiles holding their annual
meeting in Tokyo in mid-May and Tokyo Governor Ishihara Shintaro's offer to
buy the Senkaku Islands in the East China Sea.
The islands, which are part of Japan's Okinawa
Prefecture, are also claimed by China.
But these tensions did not prevent new
development in their currency trading.
Bypassing the dollar
Up until June 1, Japanese and Chinese firms had paid currency conversion
fees twice in trade and other bank transactions.
Japanese companies first had to convert the yen
into the dollar, then they exchanged the dollar for Chinese currency. For
Chinese firms, it was vice versa. With this removal of the interim step by
skipping the dollar in transactions, many expect cost reductions.
Japan ranks fourth among China's trading partners after the European Union,
the United States and the 10-country Association of Southeast Asian
while China has been Japan's largest trading partner for the past three
The total share of China and Japan in the world’s combined gross domestic
product (GDP) was 19.9%, based on purchasing power parity (PPP), according
to the IMF World Economic Outlook Report published in April 2012.
Bilateral trade rose 14.3% year-on-year to reach US$344.9 billion in 2011,
hitting a new record for the second consecutive year. China accounts for
about 20% of Japan’s world trade value. Around 50% to 60% of that is being
settled in dollars, with less than 1% of it settled in yuan. One Chinese
news outlet has estimated direct yen-yuan transactions will realize $3
billion in cost savings.
There are still cautious views on the scale of cost reductions among
Japanese market participants.
"Dollar-yen transaction costs are already
very low," Karakama Daisuke, market economist at Mizuho Corporate Bank
in Tokyo, said. "The cost reduction effect of direct yen-yuan trading
should be limited."
No pressure from the
In the past, the US appeared displeased to see China and Japan forge
stronger economic ties with each other.
For example, then US Treasury secretary Larry
Summers was viewed as a key official involved in spiking Japan's
proposal during the 1997 Asian economic crisis to establish an Asian
Monetary Fund, an idea put forward by Japan's then-vice minister of finance
for international affairs, Sakakibara Eisuke.
More recently, the US opposed the establishment of an East Asian Community,
or an economic and political bloc that might become equivalent to the
European Union, as proposed by former Japanese Prime Minister Yukio
For the US, it’s not a welcome step to see China
and Japan unite in East Asia, excluding the US.
“Regarding yen-yuan direct trading, we have
maintained close contact with the US government and exchange views
sufficiently,” an official in charge of foreign exchange at Japan’s
Ministry of Finance (MOF) said.
“We have repeatedly said this is not
something that calls for a change in the dollar-centered postwar Bretton
Woods system. So there has been no pressure from the US.”
The official pointed out that for China, direct
yuan-yen trade may have the merit of reducing the risk China faces from a
volatile US dollar.
The Lehman Brothers'
collapse in 2008 and the ensuing financial crisis caused the
dollar's value to plunge, leading China's foreign exchange reserves to
suffer a decline in value and making Beijing cautious about holding dollars.
The direct trading of the yuan and the yen may meet China's desire to
minimize risk, as investors view the yen as a safe haven currency during the
ongoing global financial crisis.
The MOF official said there are no signs that other nations such as South
Korea will follow suit.
“To start direct-trading with yuan,
sufficient trading based on actual demand as well as financial
deregulation are necessary. South Korea may not satisfy those
conditions,” the official said.
of the yuan
For China, this is a step in its moves to internationalize
the yuan, accelerating the currency's wider
use. More than 9% of China's total trade was settled in yuan last year, up
from only 0.7% in 2010, according to Xinhuanet.
Yuan-denominated trade between mainland China and Hong Kong started in July
2009, as Beijing allowed companies in Shanghai and four cities in the
southern province of Guangdong to use yuan in trade with Hong Kong, Macau
and members of ASEAN.
In July 2010, China also allowed the yuan to be
more freely traded and transferred in Hong Kong, establishing an offshore
yuan market for the first time. Yuan-denominated deposits and financial
services are also gaining ground in Japan and the big three Japanese
financial groups allow Japanese companies to hold yuan generated through
trade as deposits.
But many experts such as Mizuho's Karakama believe China will soon
face a trilemma in its economic policy.
An economy cannot combine at the same time a,
Developed nations such as Japan and South Korea
dollar peg system in order to secure
international inflows of money and discretionary monetary policies. (By
contrast, countries using the Euro abandoned individual monetary policy by
consolidating their financial policy instruments to the European Central
In April, the People's Bank of China announced it would widen the yuan's
daily trading limit against the dollar to 1% from 0.5%.
"With the internationalization of the yuan,
it will become more and more difficult for China to control the value of
the yuan," Karakama said.
Should China shift to a limited floating
exchange rate system, the yuan will likely appreciate against major
currencies such as the dollar.
Japan's business with China expanding and the
growing presence of the yuan in Japan's international trade will push down
the yen's effective exchange rate against major currencies.
Annual trade between China and Japan more than
doubled in the past 10 years, reaching $346.6 billion in 2011. In the first
four months of 2012, Japanese foreign direct investment in China rose by 16%
to $2.7 billion from one year earlier.
This is a revised and expanded version of an article that appeared at Asia