China and Japan Sign Currency Swap Deal
The currency swap deal between the two countries is a sign of easing tensions.
China and Japan signed a bilateral currency swap deal in Beijing on October 26 during Japanese Prime Minister Shinzo Abe’s visit to China. Under the new deal, the People’s Bank of China and the Bank of Japan will now be able to directly exchange up to 200 billion yuan or 3.4 trillion yen (approximately 29 billion US Dollars) each year without having to go through an intermediary currency like the US Dollar. Both sides hope the ability to directly convert from the yuan into the yen and vice versa will ensure financial stability and facilitate financial ties, according to People’s Bank of China.
The new deal came as a surprise given the tension in Sino-Japanese relations due to Chinese grievances over Japanese actions during World War II, the close ties between post-war Japan and the United States, and a series of maritime disputes during the last decade. During the Asian financial crisis in 2002, however, China and Japan agreed to a currency swap deal, and renewed it in 2007. The two countries later discontinued such practice in 2013 after disputes over the sovereignty of the Diaoyu/Senkaku islands in the East China Sea.
As the trade war between the United States and China escalates, China has become more willing to turn to Japanas a prospective partner. Two weeks ago, when Beijing first announced Abe’s visit to China – the first visit in seven years – Chinese foreign ministry spokesman Lu Kang said that the visit would “elevate our bilateral ties and put bilateral cooperation back on the right track.” Citing the United States’ increasingly protectionist stance under Donald Trump, Chinese diplomat to Japan, Cheng Yonghua said that “China and Japan, as the world’s second and third largest economies…should not sit idly by and be indifferent to the damage to global trade and the global supply chain.” Indeed, since Abe’s arrival, Beijing and Tokyo have already signed 12 other cooperative documents besides the new currency swap deal.
These 12 documents, along with the new currency swap deal signal a move towards improving relations between the China and Japan. As Chinese President Xi Jinping said during Abe’s visit, “Our relationship has encountered a lot of obstacles…But with our joint effort, the relationship has become more normalized. Xi has also commented that he will “consider seriously” Abe’s invitation to visit Japan next year, suggesting increasing cooperation between Beijing and Tokyo in the future.
For Japan, closer ties with China means walking a fine line between China and the United States. On one hand, closer ties to China means an expansion of Japanese influence in the Southeast Asia region. As Lee Myon-woo, a Japan affairs expert and vice-president of the Sejong Institute in Seoul suggests, “Japan may have adopted a different approach to limit the unilateral expansion of China’s influence over Thailand and consequently the Southeast Asian region…by engaging in projects with Beijing.”
On the other hand, Japan also needs a stable relationship with the United States. As Kotaro Tamura, an Asia fellow at the Milken Institute and a former senator and parliamentary secretary in charge of economic and fiscal policy at Japan’s Cabinet Office, says, “As we strengthen cooperation with China, the US is posing a loyalty test to its allies, including Japan. Sometimes they ask ‘which side are you on?’ So Japan needs to be very careful.”