China, Japan make currency deal

China and Japan announced plans to allow the exchange of their currency without first converting to U.S. dollars.

Adriene Hill: China and Japan have announced plans today to allow a "direct exchange" of their currencies. That means firms in China and Japan can convert their currencies directly, without first converting to U.S. dollars.

We've got the BBC's Andrew Wood now from Hong Kong to help explain. Good morning Andrew.

Andrew Wood: Good Morning

Hill: So can you explain exactly what this currency deal is?

Wood: Well, it's a big chance at the world's second and third biggest economies - namely China is the second biggest, Japan is the third biggest - to deal directly with each other. And it's a way that they can basically sideline the U.S. dollar when they're doing trade deals. And they can avoid an awful lot in risks in terms of currencies going up and down - mainly the U.S. dollar going up and down. And it's a way that they can save money on transaction costs, as well.

It's a way, also, that Japan is showing quite a bit of confidence in the Chinese economy - the Chinese government bonds, for example - to show that the Japanese are quite confident that China is a reasonable country to do business with, now. It's much more confident in the state of the Chinese economy.

Hill: And why strike this deal now?

Wood: In Japan and in China the Christmas period is not very important. So it's a great time perhaps to surprise people in the West by announcing this deal. And next year, don't forget, 2012 is the 40th anniversary of normalization of diplomatic relations between the mainland of China and Japan. In Asia anniversaries are very important so it's a great time to start announcing this prior to the anniversary here.

Hill: And what's the significance for the broader global economy?

Wood: Well, if you've got two of the world's biggest economies dealing direct with each other, then that tells you something about where trade flows are going. I mean, China and Japan, they're very important trade partners. You're talking about $340 billion of trade every year.

It's not a great sign for the dollar. I mean it does gives us indication that perhaps people are becoming less confident in the ability for the dollar to retain its value. It's a sign that perhaps the world is trying to diversify, to shift away from America, and that there confidence has been shaken.

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