China and Japan: direct currency exchange

[thomas]

This seems to be news of historic proportions: the two economic rivals China and Japan plan to replace the US dollar in their bilateral trade:

China and Japan have unveiled plans to promote direct exchange of their currencies in a bid to cut costs for companies and boost bilateral trade. The deal will allow firms to convert the Chinese and Japanese currencies directly into each other. Currently businesses in both countries need to buy US dollars before converting them into the desired currency, adding extra costs. It is the latest step by China as it seeks a more global role for the yuan.

"Given the huge size of the trade volume between Asia's two biggest economies, this agreement is much more significant than any other pacts China has signed with other nations," Ren Xianfang of IHS Global Insight was quoted as saying by the Bloomberg news agency. China is Japan's biggest trading partner. According to the Japan External Trade Organization, trade between the two countries stood at 26.5tn yen ($339bn; ﾂ≫??18bn) in 2010.

=> BBC News - China and Japan plan direct currency exchange agreement

This is expected to weaken the role of the US dollar in the region, but according to WSJ

Even so, the move is likely to be quietly welcomed by the U.S. government, which has encouraged China to seek a bigger role for the yuan. That's because U.S. government officials realizeﾂ―as do Chinese reformersﾂ―that for the yuan to play a much bigger role, China needs to broadly revamp its financial-sector policies. Morris Goldstein, an economist at the Peterson Institute of International Economics in Washington D.C. said those policies would include sharply reducing its exchange-rate intervention, liberalizing interest rates, reducing restrictions on capital flows and putting its banking system "on a more market-oriented basis," so the yuan can trade freely.

=> Japan-China Talks to Focus on North Korea - WSJ.com

=> China, Japan to push direct yuan-yen trading | News | Financial Post

 

[Astroboy]

From Japanese perspective as well as Chinese perspective, USD-based foreign currency reserve is a loss of national wealth as USD continues to be depreciable. It is not our fault, but US-government aim. Chinese government thinks of the same as Japan. Therefore, China purchases Japan's JPY-based soveregin bonds. Although JGB does not provide attractive yield, Chinese are happy as value of JGB continues to be promoted. In this regard, JGB is the same as Gold, Silver, Platinum or similars.

In the meanwhile, Japan needs to spread the risk of foreign currency reserve. Chinese Yuan-based sovereign bond is good to invest as it is expected to increase in value soon or later.