By Chris Oliver, MarketWatch
Japan's Prime Minister Yoshihiko Noda (left) and China's Premier Wen Jiabao meet Sunday at the Great Hall of the People in Beijing. The two leaders agreed to a historic currency agreement that includes the Japanese purchase of Chinese sovereign bonds.HONG KONG (MarketWatch) ? An agreement reached this week that will see Japan hold Chinese bonds as part of its foreign-exchange reserves may herald the emergence of China?s yuan as a new global reserve currency, according to analysts.
In adding the yuan-denominated bonds to Tokyo?s holdings, most of which are currently believed to be held in U.S. dollars, Japan joins a club that is so far believed to include only Nigeria, Malaysia, Thailand and Chile, according to Societe Generale.
The move ? which will see Tokyo purchase about $500 million worth of Chinese government bonds next year ? helps confer ?hard-currency? status to the Chinese currency, lifting it into the league of the U.S. dollar, Swiss franc and British pound sterling as stores of value, the French bank said.
?Markets seem not to have made much of the news, but this is an important step toward wider diversification of the foreign-exchange reserves away from the U.S. dollar, not just for Japan, but also for other nations,? said Societe Generale chief Japan economist Takuji Okubo, referring to the weekend announcements between China and Japan that have been referred to as a currency pact.
Inflation slowing after 2011 surge
U.S. inflation appears to be leveling off in the fourth quarter, as November's rate comes in at 2.5%, compared to October's 2.7%. Photo: AFP/Getty Images
Okubo said it?s likely Japan?s Ministry of Finance will slowly add yuan to its forex reserve over time, building to a base of around $10 billion worth over the next five years.
Still, he said the pace of accumulation would be limited by the relatively small size of the Chinese bond market, making it hard to meaningfully diversify forex holdings in which the U.S. currency is thought to make up 80% to 90%.
He said Japan?s decision significantly raised the yuan?s international profile, calling it was a ?starting point? in a diversification trend that would likely be adopted by other nations.
Private Japanese investors such as pension funds and insurance companies could also emerge as buyers of Chinese government bonds following the government?s announcement, Okubo said.
The move also raises the prospect that currencies of other emerging Asian nations could be lifted into the realm of investable assets in the near term, he said.
Positive spin-offs for Japan could include a shot in the arm for Tokyo as a foreign-exchange trading hub, the status of which has been on the decline in recent years, according to Okubo.
Marc Chandler of London-based Brown Brothers Harriman described the currency deal as the ?main financial development? over the Christmas holidays, though he saw it more as a strategic shift in relations between the two economic rivals.
He estimate the size of China?s so-called ?dim sum? bond market ? yuan-denominated bonds issued in Hong Kong for foreign buyers ? at around $30 billion, dominated by issuance from government entities and real-estate developers.
That level is far too small to pose any threat to the status of the dollar and euro, he said, adding that the market also lacked the necessary diversity to prove a force in international reserves.
Still, the currency pact could help soothe concerns of Japanese policy markers who worry about the fairness of Chinese access to Japanese markets at a time of a rapid and destabilizing appreciation of the Japanese yen.
?Japan also wants access to China?s capital markets because China has access to Japan?s capital markets,? Chandler said.
He said Japan might also be seeking to influence Beijing policies and gain insight into China.
?Japan wants market intelligence. It can achieve this by quite modest investments of a couple hundred millions dollars, not billions or tens of billions,? Chandler said.
Japanese exports to China totalled 10.8 trillion yen ($138.79 billion) in January through November, while about ?12 trillion of Chinese goods were shipped to Japan, with an estimated 60% of the combined trade settled in U.S. dollars, Chandler said.
Chris Oliver is MarketWatch's Asia bureau chief, based in Hong Kong.
Source: http://www.marketwatch.com/news/story.asp?guid=%7B0A071CE6-3079-11E1-80DF-002128040CF6%7D&siteid=rss
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