Yuan-yen trade set to begin

TOKYO - Agence France-Presse

Shoppers look at merchandise at Fast Retailing’s new flagship Uniqlo store in Tokyo’s Ginza district. China is set to trade with Japan, its largest trading partner in yuan and yen instead of US dollars. REUTERS photo

Japan and China said yesterday that they would start direct currency trading this week, marking the first time Beijing has let a major unit other than the dollar swap with the yuan.

The move, which will scrap the greenback as an intermediary unit, comes as China introduces measures as part of a long-term goal to internationalize its currency, and rival the dollar as the world’s benchmark.
 
The yuan-yen trade -- part of a wider deal reached last year between Beijing and Tokyo to forge closer ties --- will also be allowed to move in a wider range than the narrow band at which the dollar and yuan change hands, Dow Jones Newswires and the Nikkei business daily reported.
 
China will set a daily rate based on dealer quotes with trade allowed to move within a 3 percent band above or below that rate, the reports said, compared with a 1 percent band fixed to the yuan-dollar.
The Chinese central bank earlier yesterday introduced a rate of 7.9480 yuan for every 100 yen, Dow Jones Newswires said.

The yen trades freely against other major currencies on global foreign-exchange markets, including the greenback, with the dollar buying 79.46 yesterday. The new system, which starts on June 1, makes way for “full-fledged direct exchange trading,” Japan’s Finance Minister Jun Azumi said yesterday.

By not using the dollar as an intermediate currency “we can lower transaction costs and reduce settlement risks at financial institutions as well as making both nations’ currencies more useful”, he added.

Beijing’s tightly foreign exchange policy has triggered huge trade deficits in the U.S., which accuses China of artificially undervaluing the yuan to boost exports, and has been a long-running source of friction between the world’s two largest economies.

Yesterday, China said direct yuan-yen trade was an “important step” in “strengthening cooperation between China and Japan in developing financial markets and mutually promoting direct trading between the two currencies based on market principle.” China overtook Japan to become the world’s second-largest economy in 2010, and the neighbors are forging closer business ties despite frequent diplomatic spats over territorial claims and lingering historical animosities.

Trading partners
China is Japan’s largest trading partner, but about 60 percent of their mutual trade is denominated in U.S. dollars. The Xinhua news agency reported that the deal will save about $3.0 billion in annual costs tied to using the dollar in trade transactions.

In March, Japan said it had won approval to buy Chinese government bonds for the first time -- Beijing does not allow investors to freely purchase its debt, requiring official approval instead.

Tokyo said it would buy about 65 billion yuan ($10.25 billion) in Chinese public debt, a relatively small amount that was seen as largely symbolic. The economic powerhouses have also agreed to promote the use of their currencies in bilateral transactions -- such as yuan-denominated foreign direct investment by Japanese companies in China -- to reduce foreign exchange risks.

The yen, meanwhile, hit historic highs against the dollar last year, denting exporters whose products become less competitive overseas when the unit strengthens.