China to begin direct currency trading with Japan

The Central Bank of China announced today that China and Japan will start direct trading of their currencies in both Shanghai and Tokyo on June 1, the Wall Street Journal reported. Currently, the US dollar is used to set the exchange rate, according to Marketplace Morning Report.

"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 said, according to the Wall Street Journal.

According to the Xinhua News Agency:

For years, the greenback has been the only major direct trading currency of the yuan, also known as the renminbi, and China's main foreign exchange reserves currency, continuously keeping yuan's dependence on the US dollar.

In December, China and Japan agreed to strengthen the financial ties between their two countries, including having Japan add yuan to its foreign-exchange reserves, now mostly held in US dollars, the Wall Street Journal reported. Direct trading may help reinforce these ties.

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Currently, most of the trade between China and Japan – estimated at $300 billion in 2010 – is conducted in US dollars, the Xinhua News Agency reported.

Cutting out the middleman could boost trade and investment between the two countries by reducing foreign-exchange costs and reducing risk, the Xinhua News Agency reported. Using the dollar in trade costs China and Japan $3 billion in transaction fees annually, paid to the US Central Bank.

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