Tokyo (The Yomiuri Shimbun/ANN) - Japan and China are likely to initiate a foreign exchange system in which the yen and the yuan can be directly exchanged starting in June at the earliest, sources said.
The Japanese and Chinese governments have entered the final phase of negotiations to establish foreign exchange markets in Tokyo and Shanghai, and will likely reach an official agreement soon.
Currently the two countries' currencies are exchanged via the US dollar and thus foreign exchange commissions are relatively high.
If the direct exchange system is realised, transaction commissions can be cut and the exchange procedure will be simpler. Some economists expect it will expand trade between Japan and China and make trade processing smoother.
The two governments agreed to establish the system in December last year during a Japan-China summit in Beijing.
Since February, working-level panels from each country have been discussing the issue.
Currently, a system for exchanging the yen and the yuan is possible, but exchange markets are not well developed. Financial institutions have also not established respective systems for the exchange.
Unlike exchange deals for the yen and dollar, China does not employ a floating exchange rate in which a currency's value is determined by the market. Exchange rates between the yuan and US dollar fluctuate within a limited range that the People's Bank of China announces every morning.
With the new bilateral exchange system, it is possible the exchange rate between the two currencies will be decided freely by market forces.
If the exchange rate fluctuates wildly, however, some economists believe the Chinese authorities will stabilize it with market intervention.
In fiscal 2011, Japan's exports to China amounted to 12.48 trillion yen (US$156 billion), accounting for 19 per cent of the nation's total exports.
Imports from China were 14.78 trillion yen ($185.49 billion), accounting for 21 per cent of total domestic import value.
If the Japanese and Chinese currencies are traded directly, foreign exchange commissions from US dollar transactions will disappear.
This will reduce the costs of trade and the two countries will be able to avoid exchange rate fluctuation risks associated with the US dollar.
Companies doing business with China will experience significant cost reductions and bilateral trade will become easier.
From the Chinese side, an increase in the volume of exchange deals with Japan will result in increased circulation of the yuan outside China.
China likely aims to strengthen its currency's international influence, economists said.