The Internationalization of the Yen (Part One)

Internationalization of the Yen ( Interim Report ) 
 (MOF: 1998)

The internationalization of the yen was discussed during the 1980s in tandem with the subject of the liberalization of the Japanese financial system. Subsequently, in March 1985

(...) identified the following issues which lend current significance to the internationalization of the yen in view of recent economic and financial developments.

[1] (...)  factors contributing to the Asian currency crises (...) excessive dependence of Asian countries on the U.S. dollar. (...) internationalization of the yen is of particular significance at this time when Asian countries are moving away from virtually dollar-linked exchange regimes and looking for alternative systems. An increase (...) contribute to stabilizing the exports and macroeconomic performance of these countries, which in the long-run will be conducive to the stability of the Japanese economy.

[2] (...)  internationalization of the yen is essential given the importance of Japan in global economic activities. (...) can make a significant contribution to the risk diversification of the investments and fund management of international investors, central banks, and others.

[3] (...) while progress is being made in reforming the Japanese financial system through the so-called "Big Bang." (...) offering risk-free yen-denominated assets to non-residents can make significant contributions to improving the attractiveness of the Tokyo markets, while also heightening the effectiveness of the "Big Bang."

[4]  (...) promotion of the internationalization of the yen can significantly contribute to reducing the foreign exchange risks of trade and capital transactions through the expansion of yen-denominated business. Especially for Japanese financial institutions, the internationalization of the yen can be expected to improve their competitiveness in the international financial markets.(...)

[5] In the past, various disadvantages of the internationalization of the yen (...) negative impact on Japan's export competitiveness resulting from the growing demand for the yen and the subsequent appreciation of the yen and restrictions on domestic monetary policies. Such views, however, are disappearing, while the significance of achieving the above-mentioned benefits has been growing. 

internationalization of the yen would be predicated on the following conditions:  

[1] Sound macroeconomic management. (...) [2] Stabilization of the value of the yen. [3] (...) internationalization of the yen did not in itself represent a policy goal, but rather was something that would be realized subsequent to the improvement of the general environment of Japan's financial and capital markets. (...) internationalization of the yen would require the active efforts of both the government and private sector.

(a) (...) necessary to achieve a level of market depth and infrastructure development which is at least on par with current levels in the U.S. and European markets.

(...)it is of particularly vital importance to improve Japan's market for short- and long-term government bonds.

(...) Particular attention (...): [a] As compared to the U.S. market, there is a marked shortage of TBs and FBs in the Japanese market. Consequently, the market lacks 

adequate depth. 

(..) (c) With regard to the market for medium- and long-term government bonds: [a] Adequate liquidity is not necessarily available (...) Consequently, the markets are hampered from efficiently establishing a yield curve which can serve as an indicator for financial markets, 

(2) Issues Related to Trade and Capital Transactions

In view of Japan's importance in the world economy, the ratio of yen-denominated settlements in Japan's trade and capital transactions remains low, (...) very little change in this ratio over the past decade. The expansion of yen-denominated transactions in current and capital accounts together with the above-mentioned improvements in the financial and capital markets constitute the two wheels on which any effort to promote the internationalization of the yen must ride. The following issues were cited as factors hampering the growth of yen-denominated transactions and settlements, etc.

(a) (...) yen-invoiced trade has not grown for the following main reasons: [a] Raw materials (most importantly, crude oil) invoiced in U.S. dollars in international trade, account for a large portion of Japan's total imports. [b] In intra-firm trade between Japanese parent companies and overseas subsidiaries, there is a tendency for parent companies to assume the foreign exchange risks.

(b) In addition to the above, the ratio of Japan's yen-invoiced trade with Asia--a region with which Japan has strong economic ties--remains low due to various factors. Specific problems include [a] the inadequate development of foreign exchange markets for the yen and Asian currencies (The yen suffers the effects of a vicious cycle in which the foreign exchange markets for the yen and Asian currencies are underdeveloped because of the low volume of yen-invoiced transactions, and in turn, the volume of yen-invoiced transactions remain low because of the absence of adequately developed foreign exchange markets.) and [b] the instability of the exchange rates between the yen and other Asian currencies because such currencies had heretofore been linked to the U.S. dollar.

(c) Yen-denominated overseas lendings of Japanese banks have not been growing for the following main reasons: [a] Overseas demand for yen funds is low in the first place because use of the yen in current account transactions has not spread.(...) development of dollar-yen forward and swap markets, (...) no longer significant limitations in conducting yen business in dollars.

(d) For yen-denominated transactions to be activated, yen balances held by non-residents must first be expanded. To achieve this, it is likely necessary to increase yen-denominated imports. (...) desirable and necessary for Japan to respond to this credit crunch by expanding the available facilities for yen financing in the future. This course of action will also contribute to promoting the internationalization of the yen in the Asian region.

[2] Specific Measures to Be Considered 

(a) Specific measures pertaining to trade transactions: [a] Expanding yen-denominated trade finance facilities. [b] Expanding Tokyo international commodities markets in order to provide greater opportunities for hedging yen-denominated transactions. (...).

(b) Achieving a higher ratio of yen-invoiced trade transactions can be expected to have a significant impact on the growth of yen-denominated capital transactions as it will increase the needs of both borrowers and lenders for yen.