Trade & Finance Desk :
Japan said today it will start direct currency trading with China for the first time, scrapping the dollar as an intermediary unit to boost ties between the two Asian economic giants.
The move, which will boost trade and investment between the traditional rivals, marks the first time Beijing has allowed a major currency other than the greenback to trade directly with the yuan.
?From June 1, the yen-yuan exchange rate will be constantly indicated in both markets, facilitating full-fledged direct exchange trading,? Japan?s Finance Minister Jun Azumi told a regular press briefing.
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.
The announcement also comes as China introduces measures as part of a long-term goal of internationalising its currency to rival the dollar.
Beijing described Tuesday?s move 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.?
?The People?s Bank of China actively supports (the move),? said a statement issued by the China Foreign Exchange Trade System, the central bank?s forex arm.
The Chinese central bank earlier Tuesday fixed a rate of 7.9480 yuan for every 100 yen, Dow Jones Newswires reported.
The yen trades freely against the greenback on global foreign-exchange markets, with the dollar buying 79.52 yen in Asian trade on Tuesday.
However the yuan is allowed to move within only a tight range against the dollar.
China overtook Japan to become the world?s second-largest economy in 2010, and the neighbours 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 percent of their mutual trade is denominated in US dollars.
In March, Japan said it had won approval from Beijing 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 got the green light to buy Chinese government bond issues worth about 65 billion yuan ($10.25 billion), a relatively small amount, with Azumi saying at the time that the investment was ?an appropriate amount for the initial purpose of strengthening bilateral economic ties?.
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 currency strengthens.
Japanese finance officials have vowed to step into currency markets again to tame the value of the unit, which is increasingly seen as a safe-haven currency as the euro takes a hit owing to worries about the debt-hit eurozone.
Tags: dow jones newswires, economic giants, foreign exchange markets, global foreign exchange, yuan exchange rate