The two Asian economic powerhouses, China and Japan, will begin direct trading of their currencies from June 1, the governments in Beijing and Tokyo confirmed on Tuesday. The US dollar as an intermediary currency will no longer be used in bilateral operations.

"The move is to promote bilateral trade, facilitate the use of the yuan and the yen in international trade settlements and lower the cost of conversion," the China Foreign Exchange Trade System said on Tuesday.

China's central bank said it would support what it viewed as an important step in strengthening bilateral cooperation and developing financial markets. The direct currency trading decision came on the back of preparatory talks between Chinese Premier Wen Jiabao and Japanese Prime Minister Yoshihiko Noda last December.

Hedging against risks

Chinawill set a daily rate based on dealer quotes, with trade allowed to move within a 3.0-percent band above or below that figure. This compares with a 1.0-percent band of variance fixed to yuan-dollar trading. No fixed rates will be set in Tokyo trading, though.

"From June 1, the yen-yuan exchange rate will be constantly indicated in both markets, facilitating full-fledged exchange trading," Japan's Finance Minister Jun Azumi told reporters in Tokyo. "By not using the dollar as an intermediate currency, we can lower transaction costs and reduce settlement risks at financial institutions," Azumi added.

Chinais Japan's largest trading partner, with bilateral trade valued at $345 billion (275 billion euros). At present, an estimated 60 percent of commerce between China and Japan is settled in US dollars.

hg/mll (AFP, dpa, Reuters)