Front Matter Page

Treasurer’s Department

Contents

• Summary

  • I. Introduction

  • II. The Theory of International Currency Use

    • 1. Characteristics of an international currency

    • 2. The origins of international-currency status

    • 3. Theoretical aspects of invoicing practices

      • a. The choice of an invoicing currency

      • b. Inflation variability, information costs, and invoicing

  • III. The Determinants of International Currency Use: Implications for the Japanese Yen

    • 1. Monetary policy and inflation performance

    • 2. Liberalization of financial markets and capital flows

      • a. Overview

      • b. Liberalization of capital flows

      • c. Deregulation of the domestic markets

      • d. The Japan offshore market

    • 3. Trade patterns

  • IV. Japan’s Capital Outflows: Implications for the Yen’s International Use

    • 1. Overview

    • 2. International financial intermediation and the roles of the capital and current accounts

      • a. The role of the capital account: the nation as world banker

      • b. The current account and international currency use

    • 3. Overview of Japan’s capital account

    • 4. Japan as an international financial intermediary

    • 5. Destination and composition of long-term capital outflows

    • 6. Japan’s international financial intermediation: implications for the international use of the yen

  • V. Evidence on the International Use of the Yen

    • 1. Overview

    • 2. Currency invoicing pattern

    • 3. The yen as a medium-of-exchange vehicle

    • 4. The yen as an investment and borrowing vehicle

  • VI. Conclusions

• Text Tables

  • 1. Inflation and Inflation Variability

  • 2. Internationalization of Japanese Banking and Financial Institutions

  • 3. Development of the Japan Offshore Market

  • 4. Direction of Japanese Trade

  • 5. Share of Japanese Exports by Product Category to Asian Countries and the World

  • 6. Summary Balance of Payments of Japan, 1980-89

  • 7. Japan’s External Balance Sheet

  • 8. External Lending by Japanese Banks

  • 9. Japanese Long-term Net Capital Outflows by Type and by Destination

  • 10. Geographic Distribution of Net Long-Term Capital Flows, 1984-88

  • 11. Japanese Direct Investment by Region

  • 12. Currency Denomination of Japanese Foreign Trade

  • 13. Currency Denomination of Trade Invoicing in Selected Industrial Countries

  • 14. Currency Denomination of Japanese Foreign Trade by Region

  • 15. Foreign Claims in Japan and External Capital Market Data

  • 16. Yen-Denominated Bond Issues

  • 17. Relative Shares Based on External Capital Market Data

  • 18. Currency Composition of External Debt, Selected Asian NICs

  • 19. Official Holdings of Foreign Exchange, 1980-89

• Appendix

• References

Summary

This paper provides an account of the Japanese yen as both a key international currency and a regional Asian currency. Theoretical considerations indicate that several factors are necessary for a currency to be used internationally, including: (a) relatively low levels of inflation and of inflation variability, which in turn contribute to a stable external value of a currency; and (b) deep, open, and broad financial markets. The paper also assesses the role of a set of supplementary conditions that contribute to the emergence of international currencies, including a country’s share of world exports, the share of its exports comprising differentiated manufactured goods, and the extent of its trade with developing nations.

In general, the recent evolution of these factors is suggestive of a growing role for the yen in international financial transactions. However, despite recent measures taken to deregulate Japanese financial markets, a number of restrictions remain, which inhibit the yen’s use. The implications of the determinants of international currency use for the yen’s role in trade transactions are mixed. Although Japan’s share of world exports, and the share of its exports of differentiated manufactured products rose during the 1980s, several factors have restrained the yen’s use in international trade transactions, including: (i) the rising share of Japanese exports to industrial countries, which tend to denominate their imports in their own currencies; (ii) the thin bankers’ acceptances market in Japan, which has discouraged trade invoicing in yen; (iii) the fact that Japanese imports are mainly primary products, which are invoiced in U.S. dollars and sterling; and (iv) the pricing strategy of Japanese exporters, who have sought to invoice in foreign currencies to maintain market shares.

The pattern of a nation’s capital flows can show how international currencies emerge, given the existence of the necessary conditions for international use. In view of Japan’s enormous long-term capital outflows and its emergence as the world’s largest net creditor nation, the paper also discusses Japan’s role as an international financial intermediary. In the case of Japan, the direction and composition of capital outflows have not been very conducive to the yen’s internationalization because capital flows (both short-term and long-term) have been primarily non-yen denominated. The evidence on the extent of the yen’s use as an international currency shows that some increase in the yen’s use in international finance has occurred, but that its share of international trade transactions is much smaller than in other large industrial countries. There appears to be a relatively wider use of the yen as a regional currency in Asia. However, a yen-zone—with the yen serving first as a reference currency, and ultimately as an anchor currency, similar to the deutsche mark’s role in Europe—does not appear to be emerging.