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28 May, 2012

Yen – Yuan Direct Trading Likely to Start in June

Kyodo News Agency

BEIJING May 27, 2012 — Japan and China are expected to start directly trading their currencies in June as part of efforts to boost bilateral trade and investment, financial sources in Beijing said Saturday.

With the new step, exchange rates between the yen and the yuan will be determined solely by transactions of the two currencies, eliminated the role played by the dollar in setting yen-yuan rates under the current system.

It will be the first time that China has allowed any major currency except the dollar to be traded directly with the yuan, also known as the renminbi, the sources said.

The yen-yuan exchange system would help businesses in China and Japan, the world’s second- and third-largest economies, and reduce the risks associated with exchange rate fluctuations in the dollar. It would also cut transaction costs involving the three currencies.

In addition, the system would increase the exposure of the yen and the yuan in global currency markets, while encouraging individual investors in Japan to purchase Chinese financial instruments.

Tokyo and Shanghai are expected to be the markets handling the currency exchanges.

Market participants said the new measure could give Tokyo an advantage in yuan trading over other financial centers, such as London and Singapore, which have also been calling for the creation of a mechanism allowing their currencies to be exchanged with the yuan.

The Finance Ministry, the Bank of Japan and the Financial Services Agency have been holding talks with the People’s Bank of China on direct yen-yuan trading since Prime Minister Yoshihiko Noda and Chinese Premier Wen Jiabao agreed to boost bilateral financial cooperation at meeting in Beijing in December.

The Chinese central bank has been preparing for yen-yuan trading, such as examining ways to set a reference rate around which the yuan can fluctuate against the yen in a managed floating system, the sources said.

A Japanese banking source expressed hope the new measure would lead to steady growth of an exchange market for the two currencies, saying, “We see high potential demand for direct trading between the yuan and the yen.”