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Full report : Internationalization of the Yen for the 21st Century

Provisional Translation

Internationalization of the Yen for the 21stCentury

- Japan's Response to Changes in Global Economicand Financial Environments -
April 20, 1999
Council on Foreign Exchange and Other Transactions


On July 7, 1998, the Council on Foreign Exchange and Other Transactions(hereinafter referred to as the “Foreign Exchange Council”) was given a mandateby the Minister of Finance to provide recommendations regarding the internationalizationof the yen in light of the changes in the economic and financial environments in Japan andoverseas.

In response to this assignment, the Subcouncil on the Internationalizationof the Yen (hereinafter referred to as the “Subcouncil”) was established underthe Foreign Exchange Council. Since July 8, 1998, the Subcouncil has held eleven meetings,including six hearings with experts. An interim report was released on November 12, 1998.Corresponding with the deliberations at the Subcouncil, the Foreign Exchange Council hasheld three meetings in which it was briefed on the Subcouncil’s discussions andconsidered the overall direction for future discussions.

This report summarizes the conclusions reached during the abovementioneddeliberations and is submitted as the recommendations of the Foreign Exchange Council.

The Foreign Exchange Council has examined a broad spectrum of issuessurrounding the internationalization of the yen from various perspectives and has made avariety of proposals in this report. It is hoped that those concerned with the variousfields covered in this report in the government and private sector will conductdiscussions to promote the internationalization of the yen in accordance with the spiritof this report.

The March 1985 report of the Foreign Exchange Council identified theinternationalization of the yen as an objective to be actively pursued. Subsequently,parallel to measures for the deregulation and liberalization of Japan's financial andcapital markets, steps were taken to promote the development of the euro-yen market andthe establishment of the Tokyo offshore market to improve the convenience of the yen fornon-residents.

However, a review of the current international status of the yen revealsthat internationalization has not necessarily kept pace with what is warranted by thescale of the Japanese economy. In fact, recent developments indicate that theinternational standing of the yen may actually be receding in some respects. On the otherhand, recent economic and financial environments affecting Japan point to the need for thegreater internationalization of the yen. On the international front, one of the causalfactors of the Asian currency crises is said to be the over-dependence on the U.S. dollar,while the emergence of the euro -- which may have a major impact on the presentdollar-based international monetary system -- calls for a reconsideration of the role ofthe yen. On the domestic front, radical measures for the liberalization of the financialand capital markets are being taken under Japan's "Big Bang" with the aim topromote Tokyo as an international financial market on par with New York and London.Againstthe background of these changes in the domestic and international economic and financialsetting, and as Japan stands on the threshold of the 21st century, the question of whatJapan must do to heighten the international role of the yen has re-emerged as a vitalissue.

I. Current International Status of the Yen andRecent Changes in Domestic and International Economic Environments: Why It Is Important toInternationalize the Yen Now


1. Current Status of and Background to the Internationalization of the Yen

(1) Current Status

The current status of the internationalization of the yen can be gauged bythe extent to which the yen is being used in Japan's cross-border transactions and intransactions overseas in general, and by the growth in the volume of yen-denominatedassets held by non-residents. More specifically, internationalization refers to theexpanding role of the yen in the international monetary system and the growing weight ofthe yen in current account transactions, capital account transactions, and foreign reserveholdings.

Given that the Japanese economy today accounts for about 14% (1997) of theglobal economy and that Japan ranks as the world's largest net creditor country, theinternational status of the yen as measured against the above facts reveals that theinternationalization of the yen has not necessarily advanced to an adequate level. Thiscan be illustrated as follows.

(A) Role of the yen in trade transactions: Yen-invoiced exports accountfor roughly 35% of Japan's total exports. This figure has more or less remained unchangedfor the past several years. Dollar-invoiced transactions thus make up the majority. Theratio for imports was slightly over 20% in 1997. This figure has been increasing graduallyas a result of the increase in overseas investments by Japanese companies and theexpansion of the import of manufactured products to Japan. However, both ratios remainrather low compared to those for other major industrialized countries. In total globaltrade where the dollar dominates, the yen holds a position of only 5%, whereas Japanaccounts for 7% of total global trade.

(B) Role of the yen in capital transactions: In 1997, yen-denominatedbonds accounted for only 4.5% of international bonds issued, pointing to the diminishingrole of the yen in this area compared with the ratio in 1994 of over 13%. The share ofyen-denominated loans in the overseas lending of Japanese banks has remained essentiallyunchanged at about 20% throughout the 1990s.

(C) Role of the yen in foreign exchange markets and transactions: Thedollar maintains a predominant position as the leading currency used in foreign exchangetransactions. The share of the dollar used in foreign exchange transactions throughout theworld stood at 87% in April 1998. In contrast, the share of the German mark, the secondmost-used currency, was 30%; and that of the yen, ranked third, was 21%. However, theshare of the yen has been declining over the past 10 years (The share of the yen in 1989was 27%).

(D) Role of the yen as an asset currency: The yen maintains a relativelysmall share as an asset currency. The share of various currencies in the outstandingforeign-currency denominated cross-border liabilities of banks is as follows (as of theend of June 1998): U.S. dollar 47%, German mark 13%, and yen 6%.

(E) Role of the yen for governments: Whereas the dollar, mark, Frenchfranc, and other currencies are used by various countries as anchor currencies forpegging, the yen has not been adopted by any country as an anchor for pegging. As aninternational reserve currency, as of the end of 1997, the yen’s position was roughly5%. This indicates an erosion in the status of the yen as compared to the early 1990s.

(2) Background

During the second half of the 1980s, Japan made progress towardliberalizing its financial and capital markets. At the same time, the Japanese economy wasbooming. This served to increase world confidence in the yen. International use of the yenrose for a time following these developments. However, with the collapse of the bubbleeconomy in the 1990s and the low economic growth in Japan that accompanied it, theinternational role of the yen has stagnated or receded as witnessed in a few respects.

On the other hand, the weight of the dollar in international transactionshas actually been growing in recent years. This reflects such factors as the unmatchedinfluence of the United States on international politics since the end of the Cold War;the economic leadership of the United States over other regions of the world brought bythe development of high-tech industry; and the convenience of the dollar.

The failure to achieve a higher international status for the yen in the1990s in trade and capital transactions in particular can be attributed to the followingfactors.

(A) Trade Transactions

[1] The choice of the invoicing currency in international trade isaffected by such factors as relative bargaining power, invoicing currencies ininternational commodity markets, and trade structure. In this regard, the followingobservations can be made concerning Japanese trade: (a) internationally-traded rawmaterials traditionally quoted in dollars (primarily, crude oil and other energyresources) account for a high percentage of Japan's imports; (b) in intra-firm tradebetween Japanese parent companies and their overseas subsidiaries, there is a tendency forparent companies to assume the foreign exchange risks.

[2] In addition, there are specific reasons why the yen is not extensivelyused in Japan's trade -- particularly in imports -- with the Asian countries with which itenjoys strong economic ties: (a) the foreign exchange markets for the yen and Asiancurrencies remain underdeveloped, rendering the use of the yen disadvantageous; (b)because many Asian currencies were linked to the dollar, the exchange rates between theyen and Asian currencies were unstable.

(B) Capital Transactions

[1] As the deregulation of Japan's financial and capital markets was stillin its early phases during the second half of the 1980s, considerable attention was paidin advancing the program as the authorities remained concerned with the possible negativeimpact of deregulation on the domestic financial and capital markets. The following havebeen pointed out as causes of the stagnation of internationalization during the 1990s:some restrictions on cross-border capital transactions remained until recently; means forholding and managing yen assets by non-residents were limited; and the general environmentfor the use of the yen by non-residents, including the tax system and others wasinadequate. (These issues were substantially improved through the introduction of therevised Foreign Exchange and Foreign Trade Control Law in April 1998 and the FY1999revisions to the taxation system, both of which are discussed later.)

[2] The following factors are said to have contributed to dampening thegrowth of yen-denominated overseas lending by Japanese banks: (a) demand foryen-denominated loans is low because of the slow growth in yen-invoiced current accounttransactions; (b) because of the development of swap markets for yen-dollar transactions,there seems to be no specific disadvantage in conducting business in dollars.

2.Recent Changes in Domestic and International Economic Environments

While the current international status of the yen is as described above,the following recent domestic and international developments concerning the yen have addeda new urgency to the need to promote the internationalization of the yen.

(1)The Asian Currency Crises

[1] Many Asian countries in the past endeavored to greater or lesserextent to maintain exchange rate stability by virtually linking their currencies to thedollar. However, the Asian currency crises beginning in 1997 exposed at a stroke thecritical risk of linking a currency to the dollar without considering the level of thateconomy’s trade and investment ties with other economies.

[2] In the course of the currency crises, many Asian countries unlinkedtheir currencies from the dollar and adopted a floating system. These countries areexpected to look for new monetary systems for the future as their economic situationsstabilize. Needless to say, solid economic fundamentals are crucial to stabilizing acurrency. To achieve this, one of the important factors is to build an exchange ratesystem that better reflects international economic ties, including trade and capitaltransactions.

[3] A stable monetary system in Asia constitutes a fundamental requirementfor the stable economic development of these countries. In turn, Asian stability is avital concern for Japan as it has very close economic, political and social ties with thisregion.

(2) Introduction of the Euro

[1] The euro represents the emergence of the first currency which seeks togain a status on par with the dollar since the collapse of the Bretton Woods system. Theeconomic scale of Euroland is comparable to that of the United States, and it claims ahigh share in global capital markets. In addition, Euroland enjoys strong economic tieswith such regions as Central and Eastern Europe and Africa. Given these strengths, it ispossible that the euro will emerge as a second key currency on par with the dollar in thenear future.

[2] The emergence of the euro may lead to the end of the age of thedollar's dominance and promote the search for a new international monetary system. Or, thechallenge of the euro may provide the impetus for a review of past choices concerningcurrencies used in international transactions. This would provide a good opportunity forreviewing the role of the yen as well.

(3) Progress of the Big Bang

[1] Japan’s "Big Bang" is underway and making progress. Therevised Foreign Exchange and Foreign Trade Control Law came into effect in April 1998.This was followed in December 1998 with the implementation of the principal measures forthe reform of the financial system.

[2] Given the aim to render the Tokyo markets more attractive and to bringTokyo up to par with London and New York as an international financial market, thepromotion of the internationalization of the yen now stands as an indispensablerequirement.

II. The Need to Internationalize the Yen: Why theInternationalization of the Yen Is Being Promoted


The question of why the internationalization of the yen is necessary wasexamined in the report of the former Foreign Exchange Council. This report identifiedvarious reasons why the yen's internationalization was necessary for Japan and for theinternational economy. It cannot be denied that these earlier discussions adopted arelatively passive stance as the primary concern at the time was the reduction of theburden placed on the dollar.

Beginning in the second half of the 1980s and continuing through the1990s, the globalization of the world economy continued at an accelerated pace.Consequently, various changes have occurred in the environment of the internationalfinancial markets, including the emergence of massive and instantaneous capital movementscapable of exerting a serious impact on foreign exchange markets and the real economies ofaffected countries. In view of the changing environments affecting the yen, includingthose mentioned above, it is important to once again identify the reasons why theinternationalization of the yen should be pursued.

Taking into account recent developments, such as the experiences from thecurrency crises in the Asian countries with whom Japan maintains close economic ties andthe emergence of the euro, it should be made clear that the internationalization of theyen can contribute to achieving currency and economic stability in the Asian region, aswell as throughout the world. Furthermore, it should be realized that this in turn willprovide greater stability to the Japanese economy and will promote the national interestsof Japan.

1. The Need to Internationalize the Yen: International Perspective

(1) Contributing to the Stability of the International Monetary System

[1] Following the collapse of the Bretton Woods system, the majorcurrencies of the world have adopted a floating exchange rate system since 1973. Evenwhile it has continued to lose its value relative to other major currencies, the dollarhas remained the key currency throughout this period. This has been highly influenced bythe general confidence in the dollar as supported by the international politicalleadership exercised by the United States, and by the forces of inertia generated by theconvenience of the dollar as an international currency.

[2] On the other hand, it has been pointed out that this situation hasallowed the United States to adopt an economic policy of "benign neglect" towardforeign exchange markets.

[3] However, the United States continues to register massive deficits inits current account balances and stands as the world's largest net debtor country. Theserealities implicitly threaten the viability of the virtual single key-currency systembased on the dollar.

[4] The dollar, euro, and yen support the world's three major economicregions. As such, the euro representing Europe and the yen as the principal Asian currencyare in a position to complement the dollar. Such complementary arrangements can contributeto the establishment of a stable international monetary system supported by the soundeconomic policies of the United States, Euroland and Japan. Furthermore, from theperspective of diversifying the risks inherent in floating rate systems, it is desirableto promote the international use of the yen along with the dollar and the euro. In thisregard, the internationalization of the yen can be viewed to represent the provision of aninternational public good.

(2) Contributing to Asian Economic Stability

[1] While the Asian region has developed strong economic relations withJapan, the United States, and Europe, its ties with Japan are very strong in overall terms-- covering all aspects of trade, direct investment, capital transactions, and economicassistance. As a reaction to the recent currency crises, Asian countries are showinginterest in reconsidering the role of the yen and are calling for the expansion of itsinternational role.

[2] Now that the negative aspects of the dollar-linked system have beenrecognized, the major Asian currencies -- with the exception of Hong Kong SAR, China, andMalaysia -- have switched to a floating rate system. A review of the recent movements inthe value of Asian currencies indicates that the strong correlation which previouslyexisted between these currencies and the dollar has been weakened. At the same time, incertain instances, there is evidence of a growing correlation in the movement of thesecurrencies with that of the yen. The strengthening of the international role of the yenwill contribute to the stability of foreign exchange markets, particularly those in Asia,and to the stability of Asian economies.

[3] Using the yen more frequently as a settlement currency ininternational transactions would decrease foreign exchange settlement risks (so-calledHerstatt risks, namely, risks that arise from intraday time-zone differences insettlement) in cross-border foreign exchange transactions in the Asian region because thetime difference between Japan and Asia is less than that between Asia and either theUnited States or Europe.

[4] Taking into account the importance of Asia for Japan, the stableeconomic development of the Asian region is highly desirable for Japan itself.

2. The Need to Internationalize the Yen: Domestic Perspective

(1) Vitalizing the Tokyo Financial and Capital Markets as an InternationalFinancial Center

[1] The diversification of currencies used in international transactionsprovides market participants (both residents and non-residents) with a means for avoidingforeign exchange risks. This creates the possibility for developing new financial servicebusinesses and contributes to vitalizing the Tokyo market, the mother market for the yen.Some think that this in turn will stimulate the creation of new employment opportunitiesin Japan.

[2] If Japan's excess savings can be recycled only in the form offoreign-currency denominated flows, the nation's savings will necessarily remain exposedto foreign exchange risks. Thus, the internationalization of the yen is important not onlyas a means to vitalize the Tokyo market, but also as a step toward preserving the futureasset value of the nation's savings.

(2) Strengthening the International Competitive Position of JapaneseFinancial Institutions

[1] The vitalization of the Tokyo market, particularly the vitalization ofyen-based international financial business, will serve to create new businessopportunities for Japanese financial institutions which are based in the Tokyo market.

[2] An increase in the weight of yen-denominated assets in foreignbusiness will reduce the impact of foreign exchange risks in the computation of BIScapital adequacy requirements. Similarly, this will reduce the availability risks offoreign-currency denominated funds. It is also necessary to bear in mind that, as opposedto the case of yen-denominated transactions, there is no "last resort" availableto Japanese financial institutions when foreign currencies are used in their transactions.

[3] The growth of yen-based international financial transactions andbusiness will effectively contribute to restoring and improving the competitiveness ofJapanese financial institutions in international transactions. This follows from theadvantage they enjoy in terms of access to the vast pool of yen assets and their knowledgeand experience with yen-denominated transactions.

(3) Reducing the Foreign Exchange Risks of Japanese Companies

[1] There is no question that the expansion of yen-invoiced internationaltransactions can serve to reduce the foreign exchange risks of Japanese companies.However, methods to avoid exchange risks have been expanded with the fundamental revisionof the Foreign Exchange and Foreign Trade Control Law and theresulting development of diverse foreign exchange hedging instruments based on newfinancial technologies, and it has been pointed out that the shift to yen-invoicedtransactions may in fact generate cost disadvantages. In response to this argument, itshould be noted that hedging operations themselves involve certain costs, and that hedgingfacilities may not necessarily be available under all conditions under flexible exchangerate systems. For instance, hedging may not be available for long-term positions and inperiods of heightened volatility. The balance between the risks and costs offoreign-currency invoiced transactions must be taken fully into account in light of theseconsiderations.

[2] From the perspective of the diversification of foreign exchange risks,Japan’s trading partners, including Asian countries, stand to benefit from thetransition of a certain portion of dollar-invoiced transactions to yen-invoicedtransactions.

Note : Seigniorage is frequently identified as one of the benefits derivedfrom the internationalization of a currency. However, the seigniorage resulting from theuse of one's own currency as an international currency should be viewed as no more than asecondary benefit, and it would not be appropriate to identify seigniorage as one of theobjectives of the internationalization of the yen.

III. Issues in Promoting the Internationalization ofthe Yen: What Must Be Done to Internationalize the Yen


1. Basic Concept and Approach

(1) The internationalization of the yen brings with it certainresponsibilities. Japan will have to be prepared to accept and to respond to internationalresponsibilities, including the maintenance of stable domestic economic growth and thestabilization of the value of the yen.

(2) In promoting the internationalization of the yen, it is vital toimprove the general environment for the use of the yen in international transactions andto enhance confidence in the yen. Furthermore, in order to actually achieve a broadlybased expansion in the international use of the yen, it will be necessary for thegovernment and private sectors to undertake various efforts and reviews, including therevision of the conventional perception of the yen. Also, an awareness must be developedthat this is an issue to be addressed over the long term toward the 21st century.

(3) In promoting the internationalization of the yen, it is most realisticto begin with efforts aimed at boosting the use of the yen in Asia which shares verystrong economic ties with Japan. The active use of the yen in the process of Asia'srecovery from the currency crises and its return to its stable growth path would provide apotent impetus to enhancing the international position of the yen.

(4) For this purpose as well, it is important that Japan rapidly restoreand expand its ties with the real aspects of Asian economies through trade and capitaltransactions. Such transactions would supply yen to the Asian region and establish afoundation for the circulation of yen in international transactions.

2. Recommendations

(1) Stable Economic Growth and Financial System Restructuring in Japan

Recovery of the Japanese economy and Japan’s sound economic policiesare essential for the internationalization of the yen. Thus, the first and foremostprerequisite for assuring the broad acceptance of the yen as an international currency isto restore and to enhance domestic and international confidence in the Japanese economy bypromptly stabilizing the financial system through disposing of non-performing loans and byachieving economic recovery. This requires the restoration of medium- and long-termmacroeconomic balance.

Stabilizing the financial system promptly is also important in order forJapanese private financial institutions to revitalize their investing and lendingactivities in Asia and other overseas markets and to fill their role as principal playersin the internationalization of the yen.

(2) Stabilizing the Value of the Yen

Insofar as the world's principal currencies -- the dollar, euro, and yen-- function within a floating rate system, foreign exchange risks are unavoidably present,and the impact of these risks extends to developing countries. Therefore, diversificationof risk is an important consideration. First of all, however, achieving relative stabilityin the exchange rates among the dollar, euro, and yen is the responsibility of the UnitedStates, euro-zone countries, and Japan. This highlights the importance of policy effortsaimed at stabilizing the value of the yen as an international currency.

(3) Reviewing the Role of the Yen in the Exchange Rate Systems in Asia

[1] Today, many Asian countries have switched from a virtual dollar-linkedsystem, which they adopted prior to the currency crises, to a floating rate system.However, it can be thought that these countries will initiate a review of their exchangerate systems once their economic situation has stabilized. One of the options would be toestablish a system which stabilizes Asian currency exchange rates against a currencybasket containing the dollar, yen, euro, and other currencies, each being assigned aweight in light of trade and other economic factors. In this system, it would be desirablethat the correlation between Asian currencies and the yen be strengthened.

[2] Against the background of the emergence of the euro, there is renewedinterest among Asian countries to discuss options for future monetary systems. Given theeconomic, historical, and cultural differences between Asia and Europe, it is perhapsunrealistic under current conditions to compare the two regions. On the other hand, whilethe Asian region currently falls short of the Americas and Europe in terms of the level ofintegration of regional economic relations, there is good reason to believe that regionalintegration in Asia will be further heightened in the future. An indication of this can befound in, for example, the promotion of the ASEAN Free Trade Area concept. In thisconnection, it has been pointed out that Japan must carefully monitor the progress andmaturation of regional integration in Asia and must become actively involved indiscussions concerning future monetary systems in the Asian region.

(4) Improving the Environment for the Internationalization of the Yen

To internationalize the yen, the convenience in using the yen must beenhanced and infrastructure improvements must be made to provide greater assurance to yenusers. Among the advanced countries, deregulation, marketliberalization and economic and financial globalization have underscored the fact that theconvenience in using a currency represents the minimum necessary condition for itsinternational use. In the case of the yen, it is particularly important to makeenvironmental changes that improve the convenience of yen-based asset management andprocurement by non-residents to expand the role of the yen as a reserve currency and acurrency for financial and capital transactions. In undertaking such changes, Japan mustpay due attention to international standards and practices.

[1] Improvements in Financial and Capital Markets

A. In line with the 1995 report of the Foreign Exchange Council,cross-border transactions have already been liberalized. As the initial stage of thereform of the Japanese financial system, the Foreign Exchange and Foreign Trade ControlLaw has been revised to liberalize domestic and foreign capital transactions and toentirely deregulate the foreign exchange business.

The "Interim Report" released on November 12, 1998 by theSubcouncil on the Internationalization of the Yen under the Foreign Exchange Councilidentified various environmental and infrastructure improvements considered necessary forthe promotion of the internationalization of the yen. Particular importance was assignedto measures for increasing market depth in the short-term financial markets andarrangements for facilitating investment in Japanese government bonds by overseasinvestors. In line with these recommendations, the Japanese government announced measuresoutlined below, and implemented necessary arrangements in legal and other frameworks.

(A) A competitive price auction of Financing Bills (FBs) shall begin inApril 1999.

(B) Original issue discounts for Treasury Bills (TBs) and FBs issued on orafter April 1, 1999 which satisfy requirements, including registration of all bonds in theBOJ book-entry system at the time of their issuance, shall be exempt from withholdingtaxes at the time of issuance, and foreign corporations shall, in principle, be exemptfrom taxes on original issue discounts for such bonds.

(C) Interest income of non-residents and foreign corporations accrued frominterest-bearing Japanese government bonds (JGBs) which satisfy requirements, includingregistration in the BOJ book-entry system, and whose period for interest calculationbegins on or after September 1, 1999 shall be exempt from withholding taxes.

Note 1: The Bank of Japan (BOJ) book-entry system mentioned in (B) and (C)below excludes the individual registration systems.

Note 2: The Securities Transaction Tax and the Bourse Tax were abolishedas of March 31, 1999.

(D) To further diversify the maturities of government bonds, thirty-yearJGBs and one-year TBs shall be introduced beginning in FY1999. The call provision on JGBsissued in or after January 1999 shall be abolished.

These measures can be considered important advances from the perspectiveof the internationalization of the yen.

B. Further improvements in the financial and capital markets are importantfor greater convenience as well as for the further promotion of Japan’s Big Bang.Therefore, positive action must be taken on the following current issues.

(A) Japan’s repo market is currently based on a unique system forcash-collateralized lending and borrowing. In order to promote non-resident participation,and in view of the abolition of the Securities Transaction Tax, the transaction schemeshould be promptly adjusted to promote transactions based on repurchase agreements adoptedin the United States and Europe.

(B) One of the essential requirements for yen assets to be usedinternationally is to promote efficient yield-curve formation. This requires improvementsto be made in the market-rate indicator function of government bonds in the full range ofmaturities. In this connection, a five-year interest-bearing government bond should beintroduced to be used as a medium-term benchmark issue.

(C) In order to render Japanese capital markets more attractiveinternationally, it is also important to pursue further diversification of availableproducts in government bond markets to match the various cash flow and interest rate riskrequirements of investors. The STRIPS (Separate Trading of Registered Interest andPrincipal of Securities) program allows separate holding and trading of registeredinterest coupons and principal as individual zero-coupon bonds. This program has alreadybeen introduced in government bond markets in the United States and Europe. In light ofmarket needs, changes in the Japanese settlement system that would be required tointroduce such a program should be implemented and tax treatment for “stripped”government bonds should be considered.

[2] Improvement of the Settlement Systems

Attention has been recently focused on the importance of the settlementsystems as a vital element in the infrastructure of financial and capital markets. TheUnited States and various European and other countries have taken active measures tointroduce Real-Time-Gross-Settlement (RTGS) and Delivery-versus-Payment (DVP) systems andto shorten the settlement period. With the introduction of the euro, European countriesare showing a particularly keen interest in improving their settlement infrastructures,and progress is being made toward building settlement systems whose individual nationalelements are compatible in their handling of cross-border transactions.

These developments indicate that the improvement of Japan's settlementsystems constitutes an important and urgent issue in the internationalization of the yenand is an essential requirement for non-residents to procure and manage yen-based assetswith confidence and security. Specific improvements to be made include the following.

(A) It is highly important that the ongoing restructuring of the Bank ofJapan Financial Network System (BOJ-NET) to an RTGS system and the extension of operatinghours by the end of the year 2000 be carried out as scheduled.

(B) Considerations are currently underway to refining settlement systemsfor CP and CD with the aim of realizing DVP and other improvements. It is hoped that thiswill lead to early results.

(C) Furthermore, from the medium- and long-term perspectives, it isnecessary to broadly consider establishing more comprehensive and centralized settlementsystems for all securities, while keeping an eye on related developments in the UnitedStates and Europe.

[3] Others

(A) Central Bank Services

The decisions of foreign central banks to hold yen assets as theirofficial reserves are influenced by the quality of yen-denominated facilities offered bythe BOJ. Such decisions are also affected by the level of services provided by othercentral banks, compared to BOJ’s services. As such, it is necessary to expand theBOJ’s facilities to improve the convenience of these services, while keeping in mindthe needs of foreign central banks.

(B) International Commodity Markets

From the perspective of upgrading the hedging facilities for yen-invoicedtrade, it is necessary to diversify the commodities traded in Japan's internationalcommodity markets.

(C) In addition, in order to promote the participation of overseasinvestors, Japanese accounting rules and standards must be continuously reviewed with theaim of ensuring compatibility with international standards. Similarly, bankruptcy lawsmust be generally improved with due attention being paid to the achievement of greatertransparency.

(5) Efforts to Promote the Active Use of the Yen

The choice of currency in an international transaction is essentiallydetermined by the needs of the parties to the transaction. However, there is a strongtendency for the choice to be influenced by inertia. Given the ongoing major changes indomestic and international economic environments, it appears that it is now necessary toreview past practices and to examine the use of the yen from a new angle.

[1] Trade Transactions

(A) The choice of currency in trade transactions has a particularlyimportant role to play in the cooperative efforts of the government and private sectors inpromoting the internationalization of the yen. Various factors contributing to therelatively limited use of the yen in Japan's own trade transactions as compared to otheradvanced countries have been analyzed above. However, changing environments arestimulating greater interest in re-examining the choice of currencies in tradetransactions. As an example of this, following the Asian currency crises, Asian countriesare showing a greater interest in yen-invoiced transactions. Another positive factor isthat the convenience of the yen has been improved.

Note: Some foreign participants in the Subcouncil's hearings stated thatthere were no compelling or unavoidable reasons why transactions between Asia and Japanhad to be conducted using a foreign currency, and that in fact the use of the yen waspossible in the case of some transactions.

It was pointed out that, given the ongoing changes, there are importantadvantages to be gained from switching to yen-invoiced transactions in such cases whereJapanese companies are major importers of a product or where Japanese importers’products are sold almost exclusively in Japan -- for example, in the case of naturalresources that are currently imported in dollars. In response to this, it was argued thatthe choice of currency represents an overall decision which takes into account theindividual company's marketing and foreign exchange control strategies. In any case, thereis a growing need to re-evaluate the risks and costs associated with the choice ofcurrency, to review past currency choices, and to examine the possibility of expanding theuse of the yen in individual transactions.

(B) The yen holdings of non-residents must be expanded to promote theinternationalization of the yen. To achieve this, increasing Japan’s yen-invoicedexports is important from the perspective of giving incentives to importers of Japanesegoods to maintain yen funds, however, it is even more crucial that Japan expand itsyen-invoiced imports. Increasing yen-denominated assets in countries that holdyen-denominated debts from Japan can be expected to be significant in limiting currencymismatches between their assets and debts.

(C) It was pointed out that trade finance facilities can play an importantrole in supporting yen-invoiced trade in the Asian region which has been hit by economicturmoil following the currency crises. For example, from the perspective of providingAsian importing and exporting companies with a means for procuring yen funds, the opinionwas voiced that the yen-invoiced trade of the Asian region could be financially supportedby revitalizing the yen-denominated BA market. This opinion solicited the followingargument: although it may currently be difficult for Asian companies to access the yenmarket, in view of the fact that BA finance involves handling costs and that financialinstitutions can refinance by various means other than BA, frameworks for underwritingcredit risks of local Asian companies should be considered for the provision of credit tothem.

[2] Capital Transactions

(A) In part because of borrower needs, the bulk of the overseas lending byJapanese financial institutions has been undertaken in foreign currencies which the banksthemselves are forced to procure. This arrangement constantly exposes the banks toforeign-currency liquidity risks. This has been amply demonstrated by the rising cost offoreign-currency denominated fund procurement by Japanese banks who have suffered a dropin their credit standings. In response to the program for the rehabilitation of thefinancial system, Japanese financial institutions are reviewing their overseas operations,and their foreign branches and offices are being closed and reduced in size. Against thisbackground, Japanese financial institutions are being forced to reconsider their overseasbusiness.

Obviously, supplying yen funds through capital transactions will not onlydeepen the yen markets and serve to promote the internationalization of the yen, but willalso constitute a critical element in the yen-denominated recycling overseas of Japan'sexcess savings. In addition, Japan must actively respond to the current funding needs ofAsian countries which remain in the economic difficulties triggered by the currencycrises.

Against this background, both lenders and borrowers must review pastarrangements for overseas funding, and it is important to utilize yen-denominated fundingto promote the restoration and upgrading of the financial intermediation functions ofJapanese financial institutions.

(B) In view of the current economic environments in Asia and the recentstatus of Japanese financial institutions, official financial assistance must play an evenmore important role than it has in the past in providing yen funds to Asia. Specifically,Yen Loan Assistance, lending and guarantee facilities of the Export-Import Bank of Japan,guarantee facilities of international financial institutions, trade insurance schemes, andother forms of official financial assistance have a critical role to play at thisjuncture. For example, the following would contribute to the internationalization of theyen: (a) issuance of yen-denominated bonds by Asian governments utilizing the sovereignbond guarantee facilities of the Japan Bank for International Cooperation, a governmentalfinancial institution which will be created with the merger of the Export-Import Bank ofJapan and the Overseas Economic Cooperation Fund in October 1999; (b) provision of yenfunds through financial assistance under the New Miyazawa Initiative.

[3] Others

(A) Expansion of yen-denominated financing by international financialinstitutions

Financing by international financial institutions is currently providedmainly in dollars although the selection of the currency depends on the needs of borrowingcountries. Increasing yen-denominated financing by international financial institutions isexpected to add depth to the yen market.

(B) Active and Conscious Efforts to Present in Yen

The Japanese people tend to think in terms of dollars particularly asregards international transactions. To promote the internationalization of the yen, boththe public and private sectors must shift in perception so that they actively use the yenand make business and official presentations using yen-denominated figures.

Japan's international balance of payments is now published in yen-termsinstead of dollar-terms. This represents a step in the desirable direction. By the sametoken, the use of the yen should be promoted in describing the size of Japan'sinternational economic assistance.