Bypassing the intermediate use of the U.S. dollar, on June 1 China and Japan will begin trading their respective currencies directly. The move comes as part of an agreement forged last year between Tokyo and Beijing to establish free trade between China, Japan and South Korea.
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The direct trading will boost the yuan’s profile, reduce transaction costs, narrow trading spreads, and generally shore up trade and financial ties between Asia’s two biggest economies. Despite such benefits, however, its effects will be marginal, according to Head of Japan Strategy at Jefferies Japan, Naomi Fink:
“This measure is small compared to something like an FTA (Free Trade Agreement). If incorporated, if it actually leads to something like a greater economic partnership, then it will only provide additional liquidity, but on its own, it’s probably not enough to change the current structure of the market.”