Dilemma of restart of JPY internalization under the regional financial cooperation framework, and co-opetition relationship between CNY and JPY

LU Changrong1 CUI Yuming2

(1.School of International Relations, SUN YAT-SEN University, Zhuhai, Guangdong, China 519082)
(2.School of Economics and Management, Harbin Institute of Technology (Shenzhen), Shenzhen, Guangdong, China 518055)

【Abstract】After the Asian financial crisis, the Japanese government conducted significant correction on its traditional regional cooperation concepts, including cooperation in the financial sector. It actively advocated the multilateral financial cooperation mechanism among ASEAN 10+3 members with the purpose of rebuilding the financial and monetary order of East Asia. Although the use of JPY and JPY-denominated financial products in East Asian market have expanded to a certain extent in a short period after the Ministry of Finance of Japan implemented a series of policies, JPY will not been used across a significantly wider scope in major fields in East Asian in the long run, which indicates that the dominant role of Japan in regional financial cooperation has not been effective in promoting the realization of their policy intentions. The restart of JPY internationalization is caught in a dilemma due to the impact of regional factors. In addition, there is a long-standing logic behind the dilemma of JPY internationalization with regard to the balance between the monetary power attribute and the public goods attribute. In recent years, the CNY internationalization which has been strongly promoted should be an important entry point to re-examine the restart of JPY internationalization. Whether a benign monetary co-opetition relationship can be established between CNY and JPY is not only related to the staged goals of their internationalization, but has a profound impact on the overall financial cooperation in East Asia.

【Keywords】 regional financial cooperation; restart of JPY internationalization; CNY internalization; logic behind dilemma; co-opetition monetary relationship;


【Funds】 General Project of Shanghai Social Science Planning in 2017 (2017EGJ002) 2017 Youth Project of Human and Social Sciences Research, the Ministry of Education (17YJCZH117)

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    [1]. ① In addition to academic research, from 2001 to 2003, commissioned by the Ministry of Finance of Japan, the Institute for International Monetary Affairs of Japan established a research group focusing on economic indicators, including the scale of foreign exchange reserves, short-term debt and commercial bank borrowings in countries, including the Philippines, Indonesia, Malaysia and South Korea. The crisis relief policy implemented by the Japanese government after the Asian financial crisis was evaluated in detail. The conclusion is that the crisis relief measures of the Japanese government had restored their domestic economies to the level before 1997 in a relatively short period of time through improving their national debt situations.

    [2]. ① Judging from the specific conditions, in the public sector, an international currency should be an international reserve currency (value reserve), foreign exchange intervention currency (transaction medium) and anchor currency (the pricing unit); in the private sector, an international currency can be used as the alternative currency in private asset reserves and the investment currency (value reserve) in asset allocation, as well as the invoice currency, settlement currency (trading medium) and pricing currency (pricing unit) in international and financial trading.

    [3]. ② Nakagawa distinguishes regional financial cooperation in narrow and broad senses. Cooperation at the monetary level is in the narrow-sense category while the cooperation in other financial related fields is in the broad-sense category. The cooperation issues of the former include exchange rate stability, centralized foreign exchange management and currency swap, and the cooperation issues of the latter mainly involve three specific levels, including financial regulation, financial system construction (such as establishment of bond market), information communication, policy dialogue, talent cultivation and joint research.

    [4]. ① Representative research by Eichengreen and Bayoumi adopted the optimum currency union index assessment method to compare East Asia and Eurozone. The results of the research showed that the internal trade and investment of East Asian countries had reached a high level, and their response to impact was very fast. They believed that East Asian countries and European countries met the standards of an optimum currency union. In addition, Baek and Song analyzed China’s relevant economic indicators (including regional trade, share of manufactured goods in export, openness, asymmetry impact, economic structure similarity and factor mobility), and believed that countries and regions, such as Japan, South Korea, Indonesia, Thailand, Malaysia and Singapore, were suitable candidates for an East Asian currency union, and these countries were more in line with the conditions of an optimum currency union than the Economic and Monetary Union. Goto et al. used a trade dependence index (or trade density index) to compare the regional trade between East Asia and Eurozone, and pointed out that the bilateral trading intensity within East Asia was higher than that of Eurozone, and the bilateral trading intensity of some East Asian sub-regions was even higher than the general bilateral trading intensity within the Eurozone.

    [5]. ① The representative studies by Kwan Chi Hung and Rudiger Dornbusch proposed the “yen block” scheme with the core concept of “pegged to JPY,” but they were opposed by scholars such as Masuda. They believed that it was not realistic for the countries in the region to completely peg their currencies to JPY. In 1999, the Japanese government first proposed the establishment of currency basket system consisting of USD, JPY and EUR. The exchange rate formation mechanism of major-currency linkages raised a hot debate in the academic circle. On the basis of the major-currency basket, Ito, Ogawa, and Shimizu proposed to establish Asian Monetary Unit based on major regional currencies, with JPY occupying a major weight among them, and countries in the region turning to pegging their currencies to the currency basket. A similar view is the Asian monetary system proposed by Murase Tetsuji and the East Asian regional monetary system proposed by Li Xiao and Hirayama Kenjiro.

    [6]. ② The meeting is held at the same time as the Asian Development Bank’s annual meeting every year in principle. The participants in the early meetings were the 13 finance ministers and the president of the Asian Development Bank, and the central bank presidents of 13countries were added after the 14th meeting.

    [7]. ③ After 2010, CMI was upgraded into the Chiang Mai Initiative Multilateralization.

    [8]. ④ The key issues of regional financial cooperation were based on the joint declarations made after the 3rd “10+3” Leaders’ Meeting.

    [9]. ① With regard to the specific policies of the bond guarantee mechanism and institution building, the Ministry of the Treasury adopted the following measures after a research institute proposed the policy direction of “flexibly applying the securities guarantee function of official financial institutions and developing a credit supplement system for trading insurance.” First, the Ministry of the Treasury flexibly developed the risk guarantee function of JBIC and Nippon Export and NEXI, created a credit supplement system for corporate bonds and collateralized bond obligations (CBOs) denominated in local currency and issued by small and medium-sized enterprises in East Asia (including overseas Japanese branches) to support their bond issuance. Second, through overseas business fund loan insurance (handled by NEXI), the Ministry of the Treasury provided credit guarantees for Japanese enterprises that traded with enterprises of other countries in the region.

    [10]. ② Relying on the ABMI mechanism, the construction of regional JPY bond market promoted by the Ministry of Finance of Japan specifically includes the following three types. The first is bond issuance guarantee mechanisms, including guarantees for the issuance of local currency-denominated bonds and JPY bonds and re-guarantees for the locally issued CBOs, for example, the local currency-denominated bonds issued by JBIC in Thailand, Malaysia and Indonesia (in August 2005); the credit guarantees provided by JBIC for local currency-denominated bonds issued by local enterprises in Thailand, Malaysia and Indonesia (including local Japanese enterprises); the re-guarantees by JBIC for JPY-denominated corporate CBOs issued in South Korea (in June 2004). The second is the Market Access Support Facility (MASF) for Samurai bonds, and JBIC provided partial financing guarantees (in April 2009). The third is to strengthen the Guarantee and Acquisition toward Tokyo Market Enhancement based on MASF in the Tokyo offshore market. The issuers of JPY bonds were basically regional governments and official institutions, which were guaranteed by JBIC and received some of the bonds.

    [11]. ① It is mentioned in the New Opinions that a lack of direct currency exchange mechanism between JPY and other East Asian currencies has led to high trading costs of JPY in the foreign exchange market, which is the main reason for the continuous sluggishness of JPY in the region.

    [12]. ② Under the dollar standard, the exchange between JPY and other East Asian currencies must be conducted in the form of USD with twice charging of commission fees, which greatly hinders the exchange between JPY and other East Asian currencies. As an important part of the restart of JPY internationalization, after June 1, 2012, the CNY-JPY direct exchange system was implemented. Since the commission fees were charged only once (commission and exchange rate spread), the previous high exchange costs for financial institutions, and importing and exporting enterprises were reduced; in the meanwhile, the CNY-JPY exchange rate was also reduced due to the risk of sharp fluctuations in the USD exchange rate. The Japanese government intended to promote the formation of overseas markets dominated by CNY trading and bond issuance in Tokyo through a series of direct exchange facilitation policies, thereby expanding the circulation scale of JPY-denominated and CNY-denominated financial products. In the long run, centered on the policy of regional offshore currency construction, the Japanese government will also try to strengthen the direct exchange between JPY and other currencies apart from CNY.

    [13]. ① Apart from the “AFMM+3” (ABMI) mechanism, in June 2003, relying on the Executives’ Meeting of East Asia Pacific Central Banks, regional countries established the Asian Bond Fund. The work in the second stage (beginning in December 2004) focused on the development of local currency-denominated bonds in various countries, and two varieties of bonds were issued, including the Pan-Asia Bond Index Fund and the Single -market Funds, totaling USD 2 billion.

    [14]. ① The academic circle has summarized the reasons why the JPY bond promotion policy failed as follows: (1) Lawyer fees and bank fees were too high, and the issuance procedures were too complicated; (2) there was no English-language documents with regard to the issuance procedures; (3) in East Asia, the number of non-resident institutional investors was limited. In this study, the authors believe that the rising exchange risk between JPY and other regional currencies was the most important reason.

    [15]. ① In the existing studies, Sino-Japanese monetary cooperation is the mainstream view. Representative research by Agnès Bénassy-Quéré et al. (2000) pointed out that the emerging market economies in East Asia with close economic and trading relations should consider establishing a regional currency union, emphasizing the necessity of Sino-Japanese cooperation. Some other studies emphasized that there was a competitive relationship between Chinese and Japanese currencies. Von Furstenberg and Wei (2002) believed that CNY and JPY would compete with each other in East Asia in the future.

    [16]. ① The CNY globalization index of Standard Chartered currently covers four major offshore CNY markets, including Chinese Hong Kong, Chinese Taiwan, London and Singapore, and is obtained by calculating the growth of four business items, including deposits (wealth storage), dim sum bonds and certificates of deposit (financing instruments) , trading settlement and other international payments (international trade) and foreign exchange (trading channels).

    [17]. ② As of August 2017, CNY was the fifth largest international payment currency in the world, occupying a share of 1.94%. The main reason is that after the exchange rate reform in August 11, 2015, the CNY exchange rate fluctuated sharply and the Chinese foreign exchange reserves fell sharply.

    [18]. ③ According to official statistics of IMF, as of the end of December 2016, the CNY reserve was approximately USD 84.512 billion, accounting for only 1.07% of the world’s total.

    [19]. ① On October 1, 2016, the resolution on CNY admission in the SDR currency basket came into effect. As the first SDR currency basket member from an emerging market country, CNY occupied a share of 10.92%, exceeding JPY and GBP. Since then, the IMF has listed CNY assets separately in its “currency composition of official foreign exchange” quarterly survey to reflect the holdings of global CNY foreign exchange reserves. The IMF’s initiative fully reflects its recognition of China’s efforts to promote CNY internationalization through financial marketization reforms, and will also increase the acceptance of CNY in the allocation of foreign exchange reserves. The IMF noted that a series of major reform measures introduced by the Chinese government to support the CNY internationalization, especially the reform of market access, would facilitate the international use of CNY and the reserve management of the monetary authorities.

    [20]. ② The import and export currency pricing developments published by the Ministry of International Trade and Industry of Japan, the Share of Currency in Trade published by the Ministry of Finance of Japan and other official statistics show that after 2000, the proportion of JPY settlement in trade between Japan and East Asian countries remained stable between 23% and 28%.

    [21]. ① The circuity issue of JPY has been demonstrated by many scholars. As part of the international financial business of Japanese domestic banks, considerable short-term JPY funds flow into Asian financial centers (Chinese Hong Kong and Singapore), but eventually return to Japan. Therefore, the JPY funds have not been provided for the Asian enterprises outside Japan for trading and investment activities, and have not played a positive role in promoting the JPY internationalization.

    [22]. ② In the last decade, USD and EUR together have accounted for more than 80% of international foreign exchange reserves.


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