The Internationalization of Yen and Key Currency Questions

The Internationalization of Yen and
Key Currency Questions by Toru Iwami

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.