Recently, the tripolar currency system of the U.S. dollar, deutsche mark, and the yen has been discussed as an alternative to the system based solely on the dollar. Compared with the deutsche mark, however, the yen plays a limited role as a reserve and trade currency in the international financial system. What is the reason for this? Should it be corrected?
These questions are reconsidered in this paper by using a comparative (historical) approach. The paper stresses real factors such as foreign economic relations and economic size, rather than financial factors, in particular deregulation.
The deutsche mark has taken the leading role in intra-European transactions, although the German authorities have repeatedly introduced restrictions on international capital movements. In the 1980s, Japanese financial markets were no less liberalized than those of Germany. The limited use of the yen results not so much from financial regulations as from the structure and behavior of Japanese economy.
The history of the pound sterling and the U.S. dollar reveals the fact that, despite restrictions on international finance, each currency maintained its position owing to the network of foreign trade, the size of the domestic import market, and its competitiveness. These real factors constitute safety basis for the scale economy and “inertia.”
If yen transactions are to grow independently from the dollar, they are likely to do so in trade with East Asian countries. Despite growing capital transactions with Japan and the yen’s influence on the exchange rate policy in this region, the dollar is still more widely used by these countries because, generally speaking, they depend more on the U.S. than on the Japanese market. This is further evidence that the size of the U.S. economy supports the key position of the dollar.