November 29, 2012 1:41 pm

Sluggish start for yen/renminbi market

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Direct trading between the Japanese yen and the Chinese renminbi has got off to a sluggish start, checked by fears of a slowdown in China and by the spreading effects of a territorial dispute between Asia’s two largest economies.

Six months ago, the simultaneous launch of direct trading hubs in Shanghai and Tokyo was billed by governments on both sides as a way to cement financial ties, while reducing mutual dependence on the US dollar.

But with companies reviewing funding requirements amid a steady drop-off in bilateral trade, and with tensions exacerbated over competing claims to a chain of uninhabited islands in the East China Sea, direct settlement between the two currencies has yet to take off.

In Shanghai, average daily turnover in renminbi/yen trading is about $450m, while in Tokyo it is just $90m, according to estimates from traders.

“At the moment, there is no big incentive for Japanese companies to start using the renminbi,” said Akira Hoshino, head of FX trading at Bank of Tokyo-Mitsubishi UFJ, Japan’s largest bank. “It’s not a good time to be changing currency strategy.”

Overall, renminbi-denominated trade accounts for less than 1 per cent of the total value of trade between Japan and China, say analysts. Total trade stood at Y13.1tn ($160bn) – a fifth of Japan’s total – in the first six months of this year.

“The [Japanese] megabanks had big hopes” after they started quoting prices for direct trades on June 1, said Lisa O'Connor, Hong Kong-based director of renminbi internationalisation at Swift, the financial information provider. “But the market has not exploded as expected.”

Promoting the use of the yen and renminbi in cross-border transactions had been the centrepiece of a broad programme for “enhanced co-operation” in financial markets between Beijing and Tokyo, drawn up last December. Jun Azumi, then Japanese finance minister, said in May that by cutting out the US dollar as an intermediate currency, the programme “could lower transaction costs and reduce settlement risks … as well as making both nations’ currencies more useful and energising the Tokyo market”.

However, market participants in the Japanese capital say renminbi/yen liquidity is still so shallow that it often makes sense for traders to convert yen and renminbi to the dollar as an intermediate step, especially if trading large amounts.

Meantime, the development of renminbi-denominated financial products such as options and forwards has been held back by boycotts by Chinese officials of events in Japan, said Mr Hoshino of BTMU, who also serves as chairman of the Tokyo Foreign Exchange Market Committee.

Analysts expect trading volumes to grow eventually, as suppliers begin to offer discounts for invoicing in yen or renminbi and as financial products proliferate.

For now, though, it is “a ‘chicken and egg’ situation,” said Koji Sakuma, chief economist at the Tokyo-based Institute of International Monetary Affairs, a private research group. “Once momentum passes a certain point, growth should accelerate.”

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