The government of Japan and the communist dictatorship ruling mainland China announced a landmark agreement this week to facilitate trade between the two powers without using the U.S. dollar, relying instead on the Japanese yen and the Chinese yuan.
According to the terms of the deal, the two governments agreed to encourage trade directly in yen and yuan without having to use American dollars as an intermediary — the current practice. Companies in Japan and China will soon be able to convert the currencies directly. And the Japanese government also agreed to hold Chinese yuan in its foreign-reserves portfolio.
It remains unclear exactly how and when the agreement will be implemented. But according to news reports, both governments have already set up a working group to iron out the details. Officials said the move was aimed at reducing risk and transaction costs.
The new currency deal comes as the communist Chinese dictatorship has been taking increasingly bold steps to expand the international role of the yuan. The regime’s officials have also become ever-more vocal in attacking the dollar’s global reserve status, calling instead for a more international system managed by a world entity such as the International Monetary Fund (IMF).
Of course, China and Japan are the second and third largest economies on Earth. And their governments are the two largest foreign holders of U.S. government debt. So the deal has huge implications — at least in the long term.
“The run on the dollar that could sink its value and bring surprise hyperinflation to the U.S. has just become a lot more likely,” observed Alfidi Capital CEO Anthony Alfidi, who said the bilateral move would eventually mean higher U.S. interest rates.
This deal should be seen as a signal aimed at American authorities. “The larger message this pact sends is economic and it is directed at America: ‘We have no faith in your leadership,’” wrote Michael Moran in Slate, saying the two Asian giants had taken another “baby step” toward dethroning the U.S. dollar. He also suggested that, despite official denials, Japan was starting to increase its diversification out of American assets and currency.