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Analysis
Tokyo rethinks renminbi co-operation

Tokyo rethinks renminbi co-operation

US unilateralism, Asia connections stimulate change

by Adam Cotter in Singapore and David Marsh in London

Wed 31 Jan 2018

Japan's two-year period of relative economic buoyancy combined with yen weakness and worries about US unilateralism are both factors behind the apparent rethinking in Sino-Japanese attitudes on currency co-operation.

Following the renminbi's inclusion in October 2016 in the special drawing right, the International Monetary Fund's composite currency unit, Japan has been conspicuously absent from the general fanfare relating to the renminbi's internationalisation. Prominent Japanese financial figures stated, in private at least, that the currency's SDR inclusion was premature.

However, in the light of the renminbi's stability against the dollar over the last 12 months, coupled with Japan's weaker yen policy as part of Prime Minister Shinzo Abe's bid to break out of deflation, the mood seems to be changing.

With Chinese financial markets gaining depth and liquidity, a shift appears underway towards enhanced co-operation, including on maintaining a stable bilateral monetary and financial relationship.

The changing attitude is reflected in four key areas. In the first, the two sides are showing greater interest in joint work on currency internationalisation. As a result of Japan's prolonged economic stagnation, the yen's internationalisation slowed abruptly in recent years, while China has been making greater efforts to increase the use of renminbi.

Moves now appear under way to harmonise the two sides' approaches, driven by mutual awareness of the negative repercussions for each other's economies of problems in their business and financial environments. One such example was an appreciation of the yen and falling Japanese stock prices when Chinese capital outflows increased in mid-2015, leading to tighter Chinese exchange controls.

Worries about possible dollar liquidity shortages as the US pursues monetary policy normalisation are another factor encouraging both countries to take steps to lower over-dependence on the dollar. This ties in with a general desire for both yen and renminbi internationalisation to match the increase in regional trade and in Asian financial co-operation.

Bilateral portfolio investment represents a second area of enhanced interaction. Japanese portfolio investors are stepping up trading on Chinese stock markets, and are looking to increase access to China's bond market, the third largest behind the US and Japan. Financial authorities in Tokyo and Beijing have agreed on a framework for Japanese companies to issue renminbi-denominated bonds in China.

Third, both countries are enhancing co-operation over swap lines with other central banks. China and Japan are logical commercial and financial partners. In view of a shared sense of economic and financial vulnerability, they have responded with regional initiatives like the Asia Bond Markets Initiative, Asian Bond Fund and Chiang Mai initiative multilateralisation, all of which work to deepen economic and financial integration in the region.

China and Japan are the largest contributors to the CMIM, through which members of the Association of Southeast Asian Nations and 'Plus Three' grouping, which includes Japan, China and South Korea, have agreed to extend swap lines and credits to one another. Most of these arrangements are specified as swaps of local currencies for dollars, but four (China-Japan, China-Philippines, China-South Korea, and Japan-South Korea) involve the partners' local currencies. The bilateral swap line between Japan and the Philippines enables the Philippines to swap its local currency against yen, in addition to dollars.

Fourth, Japan, initially reluctant to take part in the Beijing-led Asian Infrastructure Investment Bank and in the cross-border Belt and Road initiative, has in recent months indicated it is ready to co-operate with these projects. Abe stated that Japan may consider joining the AIIB under certain conditions. 

A visit to Xiamen in December by the secretaries general of Japan's ruling coalition parties illustrates the progress being made in Sino-Japanese relations. Following meetings with Chinese officials, the representatives issued a joint proposal that their countries should seek ways to co-operate on substantive projects, including environmental and infrastructure initiatives. If Asia's two largest economies are able to collaborate in this way, the entire region will feel the benefits.

David Marsh is Chairman of OMFIF and Adam Cotter is OMFIF's Head of Asia.

This is the second article in a two-part series on Sino-Japanese monetary co-operation. The first appeared on 17 January.

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