As China’s yuan takes the first steps toward becoming a global reserve currency, Japan offers a lesson on how hard it is to rival the dollar’s supremacy.
The Japanese yen’s share of global reserves reached a record 8.5 percent in 1991 as the nation’s post-War industrial boom made its economy the world’s second-largest. But its economic decline soon resulted in its clout shrinking as the euro gained ground and the greenback re-asserted its dominance. While the yen is still ranked third for trading and fourth for payments, it now accounts for just 4 percent of world reserves, compared with the dollar’s 64 percent and the yuan’s 1 percent.
The yen’s failure to dent the U.S. currency’s primacy illustrates the precarious mix of policy, political will and prosperity needed for the yuan to come even close to dislodging the dollar. Like China, Japan struggled with the degree of openness needed to promote global use of its currency. By the time its markets became more accessible to foreigners, the bursting of its asset bubbles and consequent “lost decade” — coinciding with China’s dizzying rise — relegated the yen to its also-ran status as a reserve currency.
“The main lesson is that it is impossible to have a major reserve currency like the dollar or euro unless you are willing to sustain a high degree of financial market openness over a very long period of time,” said Arthur Kroeber, the Beijing-based founding partner and managing director at Gavekal Dragonomics, a research firm.
Like the yuan, the yen’s march toward liberalization was gradual and marked with ambivalence. Under the Bretton Woods system after World War II, the Japanese currency was fixed at 360 a dollar, before a trading band was introduced in 1959 to make it slightly more flexible. For three decades, all capital flows except those explicitly permitted were banned, making it easier for the government to achieve policy goals.
It wasn’t until 1998 that approval or notification requirements for financial transactions and outward direct investments were abolished. The push to internationalize the yen initially came from the U.S., which wanted greater global use to fuel appreciation and reduce Japan’s trade surplus with America.
China’s situation now isn’t dissimilar. Having thrived on an economic model of closed borders and accumulation of reserves for decades, its capital account is still closed, individuals’ foreign-exchange conversions are capped and inter-country money flows occur mainly through specific programs. Policy makers have tightened controls on outflows in the past year after the yuan’s August 2015 devaluation exacerbated depreciation pressures. The currency was little changed Friday at 6.6699 per dollar.
Lowering the hurdles to create a true freely traded currency might risk a flight of capital during times of weakness, a concept China doesn’t always seem comfortable with.
“Everyone wants this thing called ‘exorbitant privilege,’ but if you try to give it to them, they get furious and they tell you to stop,” said Michael Pettis, a finance professor at Peking University. “Countries like China that are running huge surpluses because of insufficient domestic demand — basically they are creating the role of the dollar as the dominant reserve currency.”
The term “exorbitant privilege,” coined by former French finance minister Valery Giscard D’Estaing in 1965, referred to the benefits the U.S. received for the dollar’s status.
Daniel McDowell, a Syracuse University political science assistant professor who studies international finance, made the point that the appeal of a nation’s sovereign debt market plays a key role in a currency’s internationalization. The yen never became a major reserve currency because its government bonds weren’t as attractive or as plentiful as the U.S., he said.
Overseas investors held 10 percent of Japan’s sovereign debt and treasury bills at end-June, central bank data show, compared with 41 percent for the U.S. at end-July, according to Bloomberg calculations. While the figure is around 1 percent for Chinese bonds, the nation has since February allowed all types of medium- to long-term investors to access the interbank market. Overseas funds increased their holdings of Chinese onshore bonds in June by 47.7 billion yuan to 764 billion yuan, according to latest available data from the People’s Bank of China.
China’s economic might could give it an advantage. It accounts for 18 percent of the world’s output on a purchasing power parity basis, more than Japan ever did, according to International Monetary Fund estimates going back to 1980. Despite making up just 1.1 percent of global reserves in a 2014 IMF survey, the yuan’s weight in the SDR basket from Saturday will be 10.9 percent, trumping the yen and sterling.
KKR & Co. and hedge fund manager Jim Chanos are among those who have compared China’s current economic slowdown with Japan’s woes after its real-estate and stock bubbles burst in the early 1990s. Asia’s largest economy is now coping with the slowest growth in more than two decades, while its housing market is looking overheated a year after a $5 trillion rout in its equity market.
“When the Japanese economy was booming, property and financial bubbles formed,” said Ha Jiming, Hong Kong-based chief investment strategist at Goldman Sachs Group Inc.’s private wealth unit in China. “Therefore, the yen didn’t become a very important international currency. That being said, China’s economy is bigger in size compared to Japan, so the renminbi may still have the potential to become a major currency. Eventually it will depend on how China can avoid a Japan-like boom-and-bust cycle.”
CBN Raises Customs Forex from N381/US$1 to N404.97/US$
The Central Bank of Nigeria has raised the Naira exchange rate for cargo clearance from N381/US$1 to N404.97/US$1.
This was confirmed by Uche Ejesieme, the Public Relations Officer (PRO), Tin Can Island Customs Command.
The PRO explained that it was not the customs job description to raise the foreign exchange rate but that of the central bank.
The N24 difference has been implemented on the customs system managed by Web Fontaine.
Commenting on the situation, Kayode Farinto, the Vice President of the Association of Nigerian Licensed Customs Agents, said the increase would further escalate inflation on import goods and hurt consumers’ buying power given the present economic situation.
An importer, Gboyega Adebari, who was shocked at the decision said stakeholders will be greatly affected by the decision.
According to him, “When we went to assess a job this morning, we were told that the exchange rate has been increased, though we have been expecting it, but we don’t expect that it would be so sudden. The implication of this on cargo clearance is that cost of clearance would increase by N24 difference.
“The cargoes that already enroute Nigeria would also be affected, the jobs that we want to clear this morning were affected.
“When you go back to the importer and request for money, they will tell you there is no notification of increase from customs, so the freight forwarders are the ones that would bear the additional cost.”
Naira plunged to N502 against the United States Dollar at the parallel market on Wednesday and traded at N715 to a British Pound and N605 against the European common currency, Euro.
Naira Hits N502 Against U.S Dollar at the Black Market
Persistent dollar scarcity amid devaluation and economic uncertainties plunged the Nigerian Naira to N502 per U.S Dollar at the parallel market, popularly known as the black market.
The local currency traded at N715 to a British Pound and N605 to a Euro on Wednesday morning.
At the Nigerian Autonomous Foreign Exchange Rate Fixing Methodology (NAFEX), the Naira opened at N411.15 to a United States Dollar before dropping to as low as N421.96 and eventually closing at N411.5.
The Central Bank of Nigeria had adopted the NAFEX rate as the nation’s official rate when it became clear that the apex can no long sustain Naira’s fixed-rate amid dwindling foreign reserves and weak revenue generation.
The NAFEX rate, popularly known as the Investors and Exporters Forex Window, was quoted as N410.15 to a United States Dollar on Tuesday, June 8, 2021 on the central bank’s official website.
The apex bank decision to devalue the Naira despite the ongoing economic challenges in Africa’s largest economy was because of the pressure from the World Bank and the International Monetary Fund, demanding the federal government to allow forces of demand and supply to determine the naira exchange rate against pegged Naira-USD rate.
However, with the Federal Government looking for approval from the two multilateral institutions for fresh loans, it became necessary to enforce those demands before new loan applications could be approved.
The World Bank raised Nigeria’s growth rate from 1.1 percent to 1.8 percent in 2021, saying a series of structural reforms and market-determined exchange rates will help boost economic activities.
Also, oil prices were projected to remain high in the near term.
South African Reserve Bank Imposes Administrative Sanctions on Authorised Dealer in Foreign Exchange with Limited Authority
The South African Reserve Bank (SARB) has imposed administrative sanctions on Master Currency (Pty) Limited, an Authorised Dealer in foreign exchange with limited authority (ADLA).
Authorised Dealers in foreign exchange (commercial banks) and ADLAs are persons authorised by the SARB to deal in foreign exchange transactions and are regulated accordingly. ADLAs include bureaux de change and are authorised to deal only in certain limited, designated foreign exchange transactions, including travel-related transactions.
The Financial Intelligence Centre Act 38 of 2001 (FIC Act) mandates the SARB to ensure that ADLAs have adequate controls in place to combat acts of money laundering and the financing of terrorism. Flowing from these responsibilities, the SARB inspects ADLAs to assess whether they have appropriate measures in place,as required by the FIC Act.
The administrative sanctions were imposed after the SARB conducted inspections at Master Currency (Pty) Limited, in terms of the FIC Act. The inspections found weaknesses in the control measures the ADLA, Master Currency (Pty) Limited, had in place to control anti-money laundering and combating the financing of terrorism.
It should be noted that the administrative sanctions were imposed because of certain weaknesses that were detected in the ADLA’s control measures which inhibited the ADLA from proactively detecting financial crime, and not because it was found to have facilitated transactions involving money laundering or the financing of terrorism.
The administrative sanctions imposed are as follows:
- a financial penalty of R100 000 in terms of section 45C(3)(e) of the FIC Act, for failing to provide ongoing training to employees to comply with the provisions of such Act in terms of section 43 thereof; and
- a directive in terms of section 45C(3)(c) of the FIC Act, to provide the requisite refresher training at all branches, and to submit confirmation and evidence that such training has been conducted and will continue to be conducted on an annual basis.
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