The China-Japan FX deal will be cast as an effort by the world’s second and third largest economies to undermine the international dominance of the USD.
For China this may be somewhat true but it’s probably more accurate to say it’s part of the long-term strategy of opening its markets and continuing to establish the yuan as a medium of international commerce while (very) slowly allowing it to float freely.
For Japan, it’s all about helping domestic corporations make money and devaluing the yen.
First, it will make it easier to offshore manufacturing and cut on FX commissions.
But the part of the deal gives that is being overlooked is that Japanese companies will now be able to raise yuan-denominated debt in Tokyo. Japanese investors will love this paper, it’s high yielding, in an attractive currency and backed by Japanese regulations. Over time, it could weigh on JPY.
The trick will be to get Japanese companies interested. I expect most would rather tap debt markets where rates are lower and the currency isn’t appreciating.