29.05.2012

By Simon Miller

Japan and China are to start trading their currencies directly in Tokyo and Shanghai from 1 June.

The move follows an agreement by the two countries in December last year which also sees Japan buying Chinese government debt.

By trading directly, it eliminates the use of the dollar to set the exchange rate and is part of Chinese strategy to reduce dependence in the US currency.

Speaking to reporters following the announcement, Japanese Finance Minister Jun Azumi stressed the cost benefits of the move.

"By conducting transactions without using the third country's currency, it will bring merits of reducing transaction costs and lowering risks involved in settlements at financial institutions,” he said.

In a statement, The People's Bank of China said the decision was linked to China’s ambition to use the yuan as a settlement currency for trade and financial transactions.

It commented: "Developing the direct yuan/yen trading will help form the direct yuan/yen exchange rate and reduce the trading cost for entities and promote the use of the yuan and yen in bilateral trade and investment as well as help strengthen financial cooperation between the two countries.”

A separate statement issued by the China Foreign Exchange Trade System said it will provide a market-making system for direct yuan/yen trading.

It said: “A market making system will be adopted in the direct trading between RMB and Japanese yen in the inter-bank foreign exchange market. The market makers shall undertake corresponding obligations, continuously provide the bid-offer price of CNY/JPY and make liquidity available for the market.”

Previously, yuan/yen parity was set through their respective rates against the dollar.