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Expanding Beyond Borders: The Yen and the Yuan

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  • Subacchi, Paola

    (Asian Development Bank Institute)

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    Abstract

    As all eyes are on the strategy and policy measures of the People’s Republic of China (PRC) to push the international use of the yuan, this paper turns to the internationalization of the Japanese yen and compares it with what the PRC is doing. There are some fundamental differences in the regional context and in the pattern of regional integration, and these distinguish the PRC’s current strategy from the Japanese experience in the 1980s. The yen’s development as an international currency, and the comparison with the PRC’s strategy, highlight the importance of regional integration as a way to overcome network externalities and market inertia. Using an analytical framework that assesses both the range of different roles (the scope) and geographical scale (the domain) of a currency in the global market, the paper suggests that economic fundamentals alone, albeit essential, are not sufficient to warrant a fully fledged scope and global domain of the currency. The paper concludes by suggesting that in the next decade the PRC yuan will become Asia’s leading currency due to the PRC’s deep economic integration in the region, and that the Japanese yen’s function as an international asset and store of value can be further enhanced if Tokyo’s competitiveness as a leading international financial center is improved.

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    File URL: http://www.adbi.org/files/2013.12.03.wp450.expanding.beyond.borders.yen.yuan.pdf
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    Bibliographic Info

    Paper provided by Asian Development Bank Institute in its series ADBI Working Papers with number 450.

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    Length: 29 pages
    Date of creation: 05 Dec 2013
    Date of revision:
    Handle: RePEc:ris:adbiwp:0450

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    Keywords: yuan; japanese yen; internationalization; network externalities; regional integration;

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    References

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    1. Takatoshi Ito & Satoshi Koibuchi & Kiyotaka Sato & Junko Shimizu, 2010. "Why has the yen failed to become a dominant invoicing currency in Asia? A firm-level analysis of Japanese Exporters' invoicing behavior," NBER Working Papers 16231, National Bureau of Economic Research, Inc.
    2. Barry Eichengreen & Marc Flandreau, 2012. "The Federal Reserve, the Bank of England, and the Rise of the Dollar as an International Currency, 1914–1939," Open Economies Review, Springer, vol. 23(1), pages 57-87, February.
    3. Chinn, Menzie David & Frankel, Jeffrey A., 2005. "Will the Euro Eventually Surpass the Dollar as Leading International Reserve Currency?," Center for Global, International and Regional Studies, Working Paper Series qt6p4215w1, Center for Global, International and Regional Studies, UC Santa Cruz.
    4. Yongding Yu, 2012. "Revisiting the Internationalization of the Yuan," Finance Working Papers 23311, East Asian Bureau of Economic Research.
    5. Yongding Yu, 2012. "Revisiting the Internationalization of the Yuan," Macroeconomics Working Papers 23311, East Asian Bureau of Economic Research.
    6. Yusuru Ozeki & George S. Tavlas, 1992. "The Internationalization of Currencies," IMF Occasional Papers 90, International Monetary Fund.
    7. Adam S. Posen, 2008. "Why the Euro will Not Rival the Dollar," International Finance, Wiley Blackwell, vol. 11(1), pages 75-100, 05.
    8. Yu, Yongding, 2012. "Revisiting the Internationalization of the Yuan," ADBI Working Papers 366, Asian Development Bank Institute.
    9. Barry Eichengreen, 2012. "International Liquidity in a Multipolar World," American Economic Review, American Economic Association, vol. 102(3), pages 207-12, May.
    10. Robert Mundell, 1998. "What the euro means for the dollar and the international Monetary system," Atlantic Economic Journal, International Atlantic Economic Society, vol. 26(3), pages 227-237, September.
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