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Friday marks start of direct Yen-Yuan exchange

Date Posted: 2012-06-01

Direct exchanges of the Japanese yen and the Chinese yuan will begin on the Tokyo and Shanghai currency markets on Friday, marking a transition from the U.S. dollar to other world currencies on Chinese markets.

Japanese Finance Minister Jun Azumi says the step will help reduce related costs and settlement risks arising from exchange rate fluctuations of the dollar. Reduced currency exchange costs are expected to give a boost to trade between Japan and China. Core units of Japan's three major banking groups--Mitsubishi UFJ Financial Group Inc., Mizuho Financial Group Inc. and Sumitomo Mitsui Financial Group Inc.--say that they will launch direct exchanges of the yen and the yuan in Tokyo on Friday.

In Shanghai, local units of Bank of Tokyo-Mitsubishi UFJ, Mizuho Corporate Bank, Mizuho Bank and Sumitomo Mitsui Banking Corp. are preparing to launch the services.

In the Tokyo foreign exchange market, financial institutions will set exchange rates for the yen-yuan pair just as they do in yen-dollar transactions.In the Shanghai market, the yen-yuan pair's intermediate rate will be announced every morning. Daily fluctuations will be limited to up to 3% above or below the rate.

Among currencies of industrialized countries, the yen will come second to the dollar to be directly exchanged with the Chinese currency. Since trade with China is rapidly expanding, the Japanese business community has called for the two currencies' direct exchanges. "Direct exchanges will improve convenience and contribute to reinvigorating the Tokyo market," Azumi said. At their summit meeting in December 2011, Japan and China agreed to have their currencies exchanged directly.

The yen does trade freely against other major currencies on global foreign-exchange markets, including the greenback, with the dollar buying ¥79.50 in Asian afternoon trade on Tuesday. 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”, says Azumi.

The announcement comes as China introduces measures as part of a long-term goal of internationalizing the yuan to rival the dollar as the world’s benchmark currency. Beijing’s tightly managed currency policy has triggered huge trade deficits in the United States, 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.

On Tuesday, Beijing described yuan-yen trade as 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. China is Japan’s largest trading partner, but about 60% of their mutual trade is denominated in U.S. dollars.

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