Japan is famous as a country that places primacy on economic diplomacy in its foreign policy. So is China. The fact that just ahead of his visit to India, Japanese Prime Minister Yoshihiko Noda met with the Chinese leadership in Beijing drives home this reality. During Noda’s visit to Beijing, the two countries announced a landmark agreement facilitating their trade to be conducted through their own currencies rather than the US dollar.
When the second and third largest economies of the world get together, it alone implies a tectonic shift in the co-relation of forces. The Japan-China deal has aroused worldwide interest.
China and Japan have reportedly set up a working group to work out the details so that Japanese and Chinese companies can convert currencies directly. Japan also agreed to include China’s yuan currency in its portfolio of foreign reserves.
The deal has huge implications for the world financial system and carries profound meaning as regards the directions in which the Japanese and Chinese brains are working about the world of tomorrow. Neither could be oblivious that the deal sends a message of no-confidence about America’s leadership of the world economy. Put simply, the deal becomes part of the growing tendencies toward dethroning the supremacy of the dollar.
From Tokyo’s viewpoint, the deal signals interest to diversify away from the American assets and currency in anticipation of an end to the dollar’s privileged position sooner than mainstream analysts have so far been inclined to consider. Equally, Tokyo is lending weight to Beijing’s concerted moves to project the yuan’s international role.
Indeed, if Beijing could be induced to loosen its grip on yuan, it would import more, especially from Japan, which is a critical need for resuscitating the Japanese economy, given the growing inability of the American consumer to afford Japanese products.
What is most striking in political terms — and good politics for Japan is almost always about boosting trade and investment — is that Tokyo is “acknowledging implicitly that there will be a single dominant Asian currency in the future and it won’t be the yen,” as the well-known economic historian at Berkeley Barry Eichengreen put it. It is symbolic that Japan is buying up for its reserves 10 billion dollars worth of Chinese debts.
Interestingly, the currency swap deal forms part of a big package that also includes a ‘pilot programme’ for the government-owned Japan Bank of International Corporation to sell yuan-dominated bonds in China’s domestic bond market. China’s bond market totals more than 3.2 trillion dollars in outstanding debt and has so far been closed to foreign-government entities. In sum, Japan has committed to promote the yuan — and China welcomes it.
In the Indian discourses regarding the shakers and movers in the geopolitics of the Asia-Pacific, there is little understanding of the complexity of Sino-Japanese relationship. Lines are drawn in linear fashion and the shades are only of black and white. Read the NYT report
on the Japan-China currency agreement.