China and Japan plan currency exchange agreement.

26 December 2011
Last updated at 03:22



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China and Japan plan direct currency exchange agreement











China has been pushing for the yuan to become an alternate reserve currency along with the US dollar



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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; £218bn) in 2010.

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This should encourage Japanese private investment into Chinese bonds, as well as into other Asian emerging currencies”

Takuji Okubo
Societe Generale


The plans were announced during a
visit to China by Japan's Prime Minister Yoshihiko Noda and after a
meeting with Chinese Premier Wen Jiabao.

The two leaders also agreed to allow the Japan Bank for
International Cooperation to issue yuan-denominated bonds in China, the
first time a foreign government body has been allowed to do so.

At the same time, Japan said it was also looking to buy
Chinese government bonds, a move that analysts believe may prove to be
mutually beneficial to both nations.

"By adopting Chinese bonds as a part of official foreign
exchange reserves, Japan is labelling Chinese bonds as an investable
asset," according to Takuji Okubo of Societe Generale Tokyo.

"This should encourage Japanese private investment into
Chinese bonds, as well as into other Asian emerging currencies. Such
development in turn should help develop offshore currency trading in
Japan," he added.

As for China, Mr Okubo explained that the move will help China further open up its financial markets.

The deal "is a manifest of a higher level of commitment from
China to the open-up reform, which would add credibility to the ongoing
offshore yuan experiment", he said.

Tripartite agreement?
Along with promoting bilateral business ties, China and Japan
said they had also made progress on a free trade agreement between
China, Japan and South Korea.

The proposed agreement is expected to boost trade between the three nations.

"On a free-trade agreement among Japan, China and South
Korea, we've made a substantial progress for an early start of
negotiations," Mr Noda said.

China has been pushing for the three parties to speed up
talks and proceedings on the deal, especially after Japan showed a keen
interest to participate in the Trans-Pacific Partnership Agreement
(TPP).

The TPP, a trade pact led by the US, includes Australia,
Brunei Darussalam, Chile, Malaysia, New Zealand, Peru, Singapore and
Vietnam.

It is aimed at eliminating tariffs and other barriers to
goods and services trade and investment among the member countries to
boost growth.




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Could this spell trouble for Europe? If the Common Market that Britain signed up to had remained so,this EURO crisis wouldn"t exist.