China and Japan plan direct currency exchange agreement

China has been pushing for the yuan to become an alternate reserve currency along with the US dollar China and Japan have unveiled plans to promote direct exchange of their currencies in a bid to cut costs for companies and boost bilateral trade.

The deal will allow firms to convert the Chinese and Japanese currencies directly into each other.

Currently businesses in both countries need to buy US dollars before converting them into the desired currency, adding extra costs.

It is the latest step by China as it seeks a more global role for the yuan.

"Given the huge size of the trade volume between Asia's two biggest economies, this agreement is much more significant than any other pacts China has signed with other nations," Ren Xianfang of IHS Global Insight was quoted as saying by the Bloomberg news agency.

China's yuan is set to grow in stature as a reserve currency, according to the head of South-East Asia's largest banking group. Piyush Gupta, the chief executive of DBS Group, last week told Asia Business Report that China is beginning to see the advantages of challenging the dollar's pre-eminence as the benchmark currency of choice.

China is Japan's biggest trading partner. According to the Japan External Trade Organisation, trade between the two countries stood at 26.5tn yen ($339bn; £218bn) in 2010.

This should encourage Japanese private investment into Chinese bonds, as well as into other Asian emerging currencies" says Takuji Okubo of Societe Generale The plans were announced during a visit to China by Japan's Prime Minister Yoshihiko Noda and after a meeting with Chinese Premier Wen Jiabao. The two leaders also agreed to allow the Japan Bank for International Cooperation to issue yuan-denominated bonds in China, the first time a foreign government body has been allowed to do so. At the same time, Japan said it was also looking to buy Chinese government bonds, a move that analysts believe may prove to be mutually beneficial to both nations.

"By adopting Chinese bonds as a part of official foreign exchange reserves, Japan is labelling Chinese bonds as an investable asset," according to Takuji Okubo of Societe Generale Tokyo.

"This should encourage Japanese private investment into Chinese bonds, as well as into other Asian emerging currencies. Such development in turn should help develop offshore currency trading in Japan," he added.

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