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China Seeking to Succeed Where Japan Failed in Yuan Global Push

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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.

‘Exorbitant Privilege’

“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.”

Is the CEO/Founder of Investors King Limited. A proven foreign exchange research analyst and a published author on Yahoo Finance, Businessinsider, Nasdaq, Entrepreneur.com, Investorplace, and many more. He has over two decades of experience in global financial markets.

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Nigeria Hits Historic High as Currency in Circulation Surges to N3.69 Trillion

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Nigeria’s currency in circulation surged to a historic high of N3.69 trillion, according to data released by the Central Bank of Nigeria (CBN).

This figure represents an increase of N43.07 billion or 1.18 percent from the total of N3.65 trillion reported in January 2024 and a 13.64 percent year-on-year rise from N3.25 trillion reported in February 2023.

Currency in circulation encompasses the physical cash, including paper notes and coins, actively used in transactions between consumers and businesses within the country.

The latest statistics indicate a considerable uptick in the availability of cash within the Nigerian economy.

The surge in currency supply comes amidst lingering concerns over a potential cash crunch following the monetary policy adjustments by the CBN, particularly the aggressive tightening stance of the Monetary Policy Committee (MPC).

Analysts attribute this spike to various factors, including the fear factor stemming from the cash crunch experienced in 2023 and lingering uncertainties surrounding the administration of physical currency.

Despite the surge in currency in circulation, Nigeria’s economic growth remains sluggish, with projections indicating growth rates of around 2.9 percent to 3.1 percent for 2024.

Also, inflation remains a significant concern, with the headline inflation rate climbing to 31.70 percent in February 2024 from 29.9 percent reported in January 2024, according to data from the National Bureau of Statistics (NBS).

The CBN’s proactive approach to monetary policy, including a historic increase in the monetary policy rate (MPR) to 24.75 percent, underscores the central bank’s commitment to addressing economic challenges and fostering stability amidst persistent pressures.

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Naira

Nigerian Naira Surges to N1,350 per Dollar in Parallel Market

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The Nigerian Naira has appreciated to N1,350 per dollar in the parallel market, a significant gain from its previous rate of N1,430 per dollar just a day earlier.

Similarly, in the Nigerian Foreign Exchange Market (NAFEM), the naira strengthened to N1,382.95 per dollar, indicating an upward trend across key forex segments.

Data from FMDQ revealed that the indicative exchange rate for NAFEM fell to N1,382.95 per dollar from N1,408.04 per dollar on the previous day, representing a gain of N25.09 for the naira.

This surge in the naira’s value has widened the margin between the parallel market rate and NAFEM to N32.95 per dollar from N21.96 per dollar previously.

Analysts attribute this impressive surge to recent foreign exchange reforms implemented by the Central Bank of Nigeria (CBN).

These reforms, including the consolidation of exchange rate windows and liberalization of the FX market, have contributed to bolstering the naira’s strength against the dollar.

The CBN’s proactive measures aim to promote stability, transparency, and liquidity in the foreign exchange market, fostering confidence among investors and strengthening the national currency.

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CBN Governor Reveals $2.4 Billion Forex Forwards Under Investigation

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Naira Exchange Rates - Investors King

Governor Yemi Cardoso of the Central Bank of Nigeria (CBN) disclosed that law enforcement agencies are currently investigating foreign exchange forwards valued at $2.4 billion.

This announcement came in the wake of the Monetary Policy Committee (MPC) meeting held in Abuja on Tuesday, March 26.

Governor Cardoso shed light on the meticulous forensic audit conducted on these transactions, which uncovered numerous discrepancies, rendering them ineligible for payment.

The CBN, while settling certain tranches of FX backlog, encountered transactions riddled with issues concerning their authenticity.

To address these concerns, Deloitte management consultants were enlisted to conduct a comprehensive forensic analysis spanning several months.

The audit revealed a multitude of irregularities, including allocations disbursed without corresponding requests, lack of proper documentation, and instances of outright illegality.

Cardoso emphasized the gravity of the situation, stating, “We refused to validate them because, apart from the fact that documentation was not satisfactory in many cases, they were outright illegal.”

He underscored the commitment of law enforcement agencies to investigate these transactions thoroughly.

Despite concerns about potential backlogs among stakeholders, Cardoso assured that the market remains open and transparent for addressing any outstanding contractual obligations.

The CBN has diligently verified and settled recognized backlogs of forward transactions.

This revelation comes at a critical juncture as Nigeria grapples with economic challenges, including inflationary pressures.

The MPC’s decision to raise the benchmark interest rate to 24.75 percent reflects efforts to stabilize prices and restore the purchasing power of the average Nigerian.

As investigations unfold and regulatory scrutiny intensifies, the CBN’s commitment to transparency and financial integrity will be closely monitored by stakeholders across the nation.

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