Internationalisation of the Yen Yuan

As Mark Thirwell notes here, China is on the long march to increase the internationalisation of the Yuan.

What is not usually raised in the discussion of China's (high profile) criticism of the USD is that China is not the first Asian giant to propose that the world, or at least the region, move away from the dollar as the intermediate currency of choice. Nearly a decade before Japan was calling, quietly, for something similar. But whereas Japan was, and still is, dependent on the US for its security and status in the international order, China is not. Or at least, China, unlike Japan, seems to believe that it is a great power in its own right. More on that in subsequent posts.

In fact China is really riding on Japan's coat tails with regard to the whole internationalisation of the Yuan idea. Since the early 1990s, Japan started talking about the internationalisation of the yen, with the goal of reducing the region's reliance on the dollar. Japan has already done all the research necessary to argue persuasively for the need to move away from the dollar. But unfortunately for Japan, while it has made its case that the dollar should go "down", it has not persuaded the region that the Yen should go "up". Infact, since the Asian Financial Crisis of 1997, holdings of the yen have in fact fallen in the central banks of the region.

Unsurprisingly, China's moves have caused some consternation among Japan monetary policy makers as yet another example of China stealing regional leadership from under Japan's nose. Well not exactly.

It pays to keep things in perspective. China's RMB is not convertible, and this limits its appeal as a replacement to the USD. How significant is inconvertiblity? Well, according to the Bank of International Settlement figures, the RMB is going nowhere fast. In fact the cause of the Yen continuous fall since 1990s has been a combination of its own domestic recession and the rise of the Euro. China simply does not figure as a cause for Japan's currency being run down in the region's central banks, and it is unlike that the RMB will be able to steal a march on the yen as the region's intermediate currency.



As Japan's IIMA points out, Japanese Yen is still a more suitable currency to inherit part of the USD mantle than the Chinese yuan. But as Japan has learnt, in addition to suitability based on actual use/usability (ribensei), it is vitally important that the economy have a "presence" of its own in the world market. While China is probably ahead in this regard, let's not forget Japan's role in initiating these discussions about the role of the USD.