Japan, China Currency Deal Symbolic Step, Broader Benefits Remain Unclear - Wall Street Journal

By KOSAKU NARIOKA

TOKYOâ€"While Japan and China have taken a symbolic step toward internationalization of the yuan by announcing direct trading of their two currencies, the concrete benefits of the deal are considered minimal at this stage, foreign exchange traders said.

Japanese Finance Minister Jun Azumi said Tuesday that Tokyo and Beijing will start direct trading of the yuan and the yen on June 1 as part of a broad deal agreed last year to reinforce bilateral financial ties.

Azumi said the yen-yuan exchange rate will be updated in real time in both the Japanese and Chinese markets. By avoiding the need to arbitrage between the dollar, financial institutions can lower transaction costs and reduce settlement risks.

"There are time risk and fees associated with undertaking two trades at a time," said Yuji Kameoka, chief FX strategist at Daiwa Securities. "If you can trade (yen and yuan) in one go, these exposures are lowered."

Many said, however, that the deal is unlikely to trigger any dramatic surge of direct yen-yuan trading because trading via the dollar is already taking place and China is yet to fully liberalize its capital and financial markets.

With the dollar/yuan still controlled under a floating band and the capital and financial markets not fully liberalized, "it's unlikely the trade between yen and yuan will increase dramatically," said Daisaku Ueno, senior foreign exchange and fixed income strategist at Mitsubishi UFJ Morgan Stanley Securities.

Some Japanese companies meanwhile welcomed the deal between Asia's two-biggest economies.

Yasuchika Hasegawa, chairman of the Japan Association of Corporate Executives and president of Takeda Pharmaceutical Co. (4502.TO), said Tuesday that "it's desirable the relationship with China moves a step forward through such a deal."

A spokesman at Fast Retailing Co. (9983.TO), the operator of Japan's rapidly expanding Uniqlo casual clothing store chain, said the latest move will help contribute to internationalization of the Chinese currency and is a welcome development from the standpoint of progress in trade between Japan and China.

Still, the spokesman said the company, which operates about 100 Uniqlo stores in large Chinese cities such as Shanghai, needed to explore the potential benefits.

"We will study how we can respond to the move after gathering further information," he said.

Given the large trade taking place between Japan and China, some says there may be good growth potential for the yen/yuan market although trading via the dollar is likely to dominate the global foreign exchange market for the time being.

Annual trade between China and Japan more than doubled to Y27.541 trillion between 2001 and 2011, according to the Japanese Finance Ministry. But most of that is being settled in dollars, with less than 1% of it settled in yuan, based on data from Japanese banks given to the Ministry of Finance.

"As transfers of capital are further liberalized, there will be room for more growth in the yen/yuan market," Ueno said. "Still, it'll be very small compared with the entire market."

The average daily trading of yuan in Tokyo stands at $350 million, according to a survey on April 2011 data by the Tokyo Foreign Exchange Market Committee, mainly through nondeliverable forwards, typically used as a proxy for currencies that are not fully convertible. That compares to the average daily turnover of foreign-exchange trading in the Tokyo market of $284.6 billion.

-By Kosaku Narioka, Dow Jones Newswires; 813-6269-2784; kosaku.narioka@dowjones.com

--Alex Martin and Hiroyuki Kachi contributed to this article.