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How the Yuan – Yen Trading Pact Affects the United States
China and Japan signed an agreement allowing them to exchanged yen and yuan directly. This avoids the prior need to exchange their currencies into United States dollars before making deals. How does this currency trading pact between China and Japan affect the United States?
Effects of the Yuan and Yen Trading Pact
By eliminating the need for each country to convert their currency into American dollars to trade, they will decrease the demand for American currency altogether. This insulates the Asian nations from currency fluctuations during trading in case of future American currency devaluation. However, this move also decreases the demand and thus value of American currency today. It also stabilizes these Chinese and Japanese currencies by providing another way to convert them and exchange them regardless of American trade policies.
The Yuan – Yen currency trading pact helps tie the Japanese and Chinese economies together, accelerating trade between them. As this trend continues, Japan, once a stalwart ally of the U.S. in Asia, may balance its allies with the U.S. against its economic ties with China. China's currency, the Yuan, will see its value rise because it can be traded in more internationally recognized Yen.
The impact of Japan's demographic decline is reduced when it tightly binds itself to a much larger, growing market. Even if China's economic growth slows as its population levels off, there are still a billion consumers who want to move up the economic ladder, from living on $1-2 per day to $10-20 per day. These consumers want electricity, labor saving appliances, plumbing, more variety in their diets and a dramatic shift upward in their standard of living. Japan can supply many of these goods at low prices, without the transportation costs incurred by sending products to the United States.The Yuan-Yen currency trading agreement facilitates this shift, making it more convenient for Japan to sell to the U.S. instead of China.
This Asian currency pact will also drive more manufacturing from Japan to mainland China. Japanese auto manufacturers like Toyota and Nissan have built massive automotive plants in the U.S. to be close to their consumers. Japan will likely shift future production of large items like appliances and cars to China. This will stem any future employment growth in the U.S. from Japanese companies that had moved manufacturing to America.
China has been expanding its influence in Asia, and with its actions against ISIS, on a world stage. Tighter Chinese economic ties with Japan independent of the United States gives China equal or greater influence with that nation than the U.S. This also creates a carrot in the form of economic cooperation to influence Japanese policy in addition to Chinese military policy.
Rivals of the U.S. like Iran can now more readily trade with China via the Yen as an intermediary currency, without relying on dollars. This allows those nations to bypass currency trading limitations or financial reporting requirements set by the U.S. government.